Market participants should pay attention to FICO scores even if they are above 700 and command no pay-up, Deutsche Bank analysts said in a recent report.
In a largely discount mortgage universe, superior carry is derived from faster prepay prints. And those who diligently look through their inventory and identify characteristics that are associated with higher turnover speeds usually get rewarded, Deutsche analysts said. Although the specified pool market has always emphasized seasoning, loan size and credit scores are important determinants of discount turnover speeds as well. In the study, analysts started by sorting the outstanding FNMA 5s into 10 equal size buckets from fastest to slowest and according to June 2006 CPR prints. The fastest bucket has the lowest original credit score (OCS) - which is typically FICO - and the lowest average original loan size (AOLS). However, it does not have the highest WALA. Repeating this same exercise for FNMA 4.5s and 5.5s basically gives the same result. In short, the combination of low OCS and low AOLS seems to produce the fastest prepayment print for the discounts, even though the OCS for the fastest bucket tends to be only five to 10 points lower than that of the rest of the buckets and well above 700.