When Fannie Mae and Freddie Mac launched credit risk-sharing mortgage bond deals last year, it was met with excitement by investors. Recently, analysts from Wells Fargo (WFC) suggested that the shine may have come off of the deals as the spreads “appear rich compared to other asset classes.”
Analysts from Fitch Ratings do not share those sentiments. In a trend report, Fitch’s Grant Bailey and Ryan O’Loughlin write that the performance of the deals has been “stellar” and that the ratio of delinquencies and defaults “remain immaterial.”
In total, the GSEs have issued $6.1 billion in notes in the risk-sharing deals. According to Fitch’s data, only 0.17% of the loans are currently delinquent.
They cite the strong credit characteristics of the borrowers in the risk-sharing pools. According to data from the credit ratings agency, the average FICO score for the GSE risk-sharing deals is 763. “Even compared with strong-performing vintages, such as those prior to 2005, the reference pools have significantly higher average FICO scores (763 versus 716),” the analysts said.
The analysts also note that the loan repurchases due to issues identified through GSE quality control reviews have outnumbered non-performing credit events by more than two-to-one. They also note that all but one of the repurchased loans were performing at the time of repurchase, which reflects the upfront quality control reviews the GSEs perform.
“Though repurchases are outpacing credit event defaults, both figures are still extremely low as a percentage of the total amount of the loans in GSE risk-sharing transactions securitized so far,” Bailey said. “The early repurchase activity reflects the upfront quality control reviews both Fannie Mae and Freddie Mac perform on a sample of loans post-acquisition.”
Fitch’s analysts expect Fannie and Freddie to continue targeting a high percentage of loans for review, “particularly for credit events within three years of acquisition.”
The analysts also expect Fannie and Freddie to issue more risk-sharing deals on a quarterly basis. Fitch is involved in the ratings process for risk-sharing transactions and so remains a vigilent monitor.
