The tide has turned and fast!
As SBA prepayment speeds creeped up in 2019 a number of investors bailed out. Some investors sold SBA pools at reduced pricing levels and invested in MBS. Some accounts replaced premium SBA pools with buying par SBA pools because there was minimal, if any, embedded principal.
In the meantime, MBS prepayment speeds have accelerated greatly, and SBA prepayment speeds are steady or declining. As such, the hardest hit investors sold SBA pools at reduced prices and purchased premium priced MBS.
Fixed Rate 30-yr CPRs continue to elevate as demonstrated using FN 3.5% 30-yr generic MBS as an example Speeds have increased from 11 CPR May 2019 to 55 CPR May 2020.
Meanwhile, prepayment speeds on SBA pools have remained steady or are decreasing.
“As for the largest sector in the market, 20+ years to maturity:
- The ACPR came in at 11.96%, a decrease of 6% from the previous reading of 12.74%.
- The CCPR came in at 11.11% versus 11.60%
- The LCPR recorded 12.10%, down from 12.63%, previously.
This month was basically a mirror image of last month. Expect a significant decrease next month as the virus’ impact on prepayments is on full display.”
The statements/reporting is from GLS (Government Loan Solutions) – “The CPR Report” [May, 2020]
While past performance is not indicative of future performance consider the last economic downturn in 2008. The LWSJ prime rate was 3.25% in January of 2009, the same as it is today.
- The lifetime prepayment speed of SBA pools with an 8-11 year WAM was 14.8% in January of 2009 and bottomed out at 8.9% in June 2016.
- The lifetime prepayment speed of SBA pools with 21 year+ WAM in January of 2009 was 20.6% and bottomed out at 7.0% in March of 2015.
- For speeds to decline respectively by 4.9% and 13.6%, speeds had to dip substantially below the 8.9% and 7% to end up at the respective levels.
- SBA lifetime CPRs since January of 1997 are available at the Hanover Securities website.
- Small businesses do not have the easy refinancing opportunities as do conforming mortgages.
- As Prime declines, interest payments due decline.
- PPP is providing emergency financing support that can be used for scheduled loan payments and forgiven for the balance of 2020.
- SBA is currently covering SBA P&I payments for 6 months (began March 27th).
We have always advocated layering in new SBA pools that prepay the slowest to balance out the higher prepayment speeds of seasoned paper. Like any other investment, it is very hard to pick the peak or bottom of any market. Investing in premium pools and IO’s is the best way to capitalize on this trend.