Recent history is showing a persistent (and widening) gap between VA and FHA loan prepayment speeds in Ginnie Mae securities.
Over the past 33 months, VA 30-year loans are prepaying 40 percent faster than FHA 30-year loans (9.4% CPR for VA vs. Just 6.6% for FHA. VA speeds over this period are ranging from 1.15x to 1.77x FHA speeds.
This divergence is not incidental. With a median spread between the two of around 230 bps, the difference compounds significantly in modeling cash flow expectations and MBS pricing.
Why this divergence?
At least three structural factors contribute to faster VA speeds relative to FHA:
- Borrower Profiles: VA borrowers tend to have higher credit scores (727 average FICO as of Sept 2025) than FHA borrowers (678 average FICO). This makes VA borrowers more likely to refinance quickly when market conditions shift.
- Program Rules: VA’s streamlined refinancing programs are generally more accessible, lowering the cost of refinancing compared to FHA.
- Servicing Practices: The VA loan servicing ecosystem has historically been more efficient, which can accelerate churn relative to FHA pools.
- Larger Loan Size: The average VA loan size is typically larger than the average FHA loan size, making refinancing more impactful for VA borrowers.
What does this mean for Ginnie II TBA & Custom pools?
Ginnie II TBAs typically combine both VA and FHA collateral. Most of the loans are FHA, but VA loans still account for a significant share. Because VA loans prepay substantially faster, TBA investors are effectively buying into faster prepayment risk than they would see in a purely FHA pool.
This risk manifests itself both in the form of shorter duration and more negative convexity exposure. Investors in Ginnie II TBAs may see faster principal return than modeled if VA share is high, especially if the model fails to differentiate between VA and FHA loans, and the additional negative convexity in VA loans will adversely impact OASes, ceteris paribus.
For investors seeking more tailored exposure, custom Ginnie pools provide a way to isolate or avoid VA prepayment risk. For instance:
- FHA-only pools offer slower, more stable prepayment behavior, attractive for investors prioritizing duration stability.
- VA-dominant pools may appeal to investors willing to take on higher turnover in exchange for price discounts or optionality in certain market environments.
Given current market spreads, the differential between VA and FHA speeds is unlikely to narrow materially in the near term. As refinancing incentives fluctuate, VA borrowers will continue to exhibit faster churn than FHA counterparts.
For Agency portfolio managers and traders, this reality underscores the importance of collateral composition within Ginnie II TBAs. It also highlights the importance of prepayment models capable of recognizing the differences between FHA and VA loans and taking those differences into account when making forecasts.
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