Investors could be lured back into the mortgage space sooner than expected with the government-sponsored enterprises acquiring higher quality loans, creating a class of mortgages designed to entice capital.
With plans of engaging in credit risk transfer transactions in the works, Fannie Mae and Freddie Mac publicly released historical loan-level credit performance data — a move that allows it to map out the eventual wind down of Fannie Mae and Freddie Mac, Fitch Ratings claims.
The Federal Housing Finance Agency as well as other policymakers indicated that this is an important step towards returning private capital back to the mortgage finance market.
As a result, an analysis of the historical data was completed to assist investors in evaluating upcoming credit-sensitive securitization proposals from the government-sponsored enterprises.
The most notable trend was an improvement in the credit quality in recent vintages.
The credit quality of agency loans originated since the start of 2009 is notably better than that in prior vintages, the credit ratings agency said.
Coupled with the addition of strengthened risk management and quality control at the GSEs, defaults on recent vintage loans will outperform historical levels.
The high credit quality vintages offer larger incentives for investors to stake a claim in the private sector, gradually building confidence that the securitizations provide an attractive yield, which is something many financiers are still weary of.
“Similar to what we’ve observed in the private market, post-crisis GSE originated loans have recorded strong performance to date,” said Fitch Ratings Managing Director Rui Pereira.
He added, “The recent performance reflects both better credit quality and improved underwriting controls.”
There are historical differences between the Fannie Mae and Freddie Mac datasets.
For instance, loans in the agency datasets originated during the peak vintage years of 2005-2008 have outperformed private-label loans in aggregate from the same period. This is due to differences in loan attribute concentrations.
While different concentrations of loan attributes result in performance distinctions between enterprise and private-label loans, the performance is comparable across all three sets when all drivers are controlled for, Fitch said.
Put simply, loans with similar attributes have generally performed similarly regardless of whether they are agency or nonagency loans.
Thus, Fitch found “no inherent risk unique to any one dataset that cannot be explained by differences in loan attributes.”
Overall, originated loans in both the agency and nonagency sector are high credit quality and are expected to experience lower lifetime defaults than loans originated the previous year – producing attractive returns for investors.
However, new agency pools are expected to experience modestly higher defaults than recently issued private-label pools due to differences in credit qualities.
“The main driver behind the higher default expectations are higher combined loan-to-value ratios, lower property values and less liquid reserves,” Fitch concluded.
