Correspondent and mortgage broker loan product notably contributed to the recent prepayment surge in lower coupon securitizations, this time with a loan compensation rule-related twist, according to a Barclays Capital report.
What the Barclays researchers' analysis indicates is that given the third-party originator compensation restrictions that recently went into place, loan officers are likely to, in particular, target higher loan sizes for refinancing.
Consider the comp restrictions to see why. As the researchers note, compensation can still be tied to the size of the loan although other types of compensation related to other factors such as the loan term are no longer allowed. This changes the dynamic of the so-called TPO effect.
Barclays finds the TPO effect to be more dramatic this time around than last year, when rates were similar. There also is a bigger difference between TPO and brick-and-mortar retail channel residential mortgage originations than in the past.
Its research finds retail loans were slower when controlled for loan size, possibly due to the fact that “most” Home Affordable Refinance Program loans are processed through the retail channel.
The Barclays report suggests the TPO effect could be a strong enough influence to possibly make it worthwhile to achieve call protection by investing in securities backed by loan pools that have low TPO percentages.
Also Barclays suggests that given the aforementioned effect of the new compensation rules, low loan balance pools could be a stronger source of call protection today. Low loan balance and low TPO specified pools can be used to achieve this call protection, Barclays analyst Wei-Ang Lee told NMN.
Improved analytics that are providing more granular loan data help with strategies like these. The Barclays report notes, for example, that its single security analyzer allows investors to break out prepayment speeds by broker, correspondent and retail, as well as other loan characteristics such as pre/post-HARP.
With ABS East taking place last week in Miami there was a lot of talk about analytics. One notable in that it suggests the direction credit risk analysis is evolving is an offering from longtime prepayment expert Andrew Davidson and his company.
Anne Ching, product manager, said in an interview last week that the offering can be used to augment credit ratings or get a kind of second opinion on credit risk.
Among other things, the analytics provide what are called breakpoint ratios, which Ching describes as somewhat similar to credit ratings as they provide a “likelihood of default” probability, based on specified criteria such as a certain home price path. It includes a numerical score representing how likely it is, based on this analysis, that there will be a principal writedown of a bond.
It also measures “effective thickness” or leverage, which aims to give borrowers a sense of how quickly bonds might be wiped out if losses occur based on a numerical scale. This is based on how dollars of collateral loss translate into loss of principal on a bond. Average loss and expected shortfall also are analyzed and an overall composite score is available.
