GSEs Could Lose $448bn on MBS Guarantees, Says Amherst
Losses on the combined credit-guarantee books of government-sponsored enterprises (GSEs) Freddie Mac (FRE) and Fannie Mae (FNM) could reach 9.6% - or $448bn - according to market analysis by Amherst Securities Group. The projections are the first round of analysis Amherst has conducted that include the LoanPerformance Prime Servicing Database compiled by First American CoreLogic - the property and ownership information provider subsidiary of The First American Corp. (FAF). "Since the GSEs and banks publish limited information on mortgage loans performance, it has always been difficult to obtain aggregate information on the mortgage market," Amherst said in commentary today. "This is about to change. We have harnessed the new LoanPerformance Prime Servicing Database" that covers about 29m prime loans and 92m closed (either paid off or servicer-terminated) loans. Based on payment history and re-default trends tracked in the LoanPerformance data, Amherst projects that Freddie will ultimately lose around $178bn of its $1.86trn credit guarantee book, and Fannie will likely lose $270bn of its $2.81trn credit guarantee book. "Note that we have used the same default rate and severity for Fannie and Freddie," Amherst said. "In reality, the Fannie guarantee business has a higher percentage of risk layered loans than the guarantee business at Freddie. Consequently, these loss estimates are probably proportionately too low for Fannie, too high for Freddie." These projections are based on the assumption all non-performing and re-performing loans eventually default, as do half the performing loans with negative equity. Amherst reasoned that once a borrower is 60+ days delinquent, the cure rate is "well under 10%." Even if modified and returned to re-performing status, the re-default rate remains "unbelievably high." Amherst senior managing director Laurie Goodman has said programs like the Home Affordable Modification Program (HAMP), which aims to bring monthly mortgage payments within affordable limits by reducing mortgage rates or extending loan terms instead of addressing negative equity, are "destined to fail." Amherst's eventual loss projections come after the GSEs implemented 405,700 HAMP permanent modifications or trials as of Nov. 30, 2009, according to a report from their conservator. Foreclosure starts declined in Q309 by 15% to 254,200 from the previous quarter, but completed foreclosure and third-party sales increased by 23% to almost 71,000. Voluntary buyouts of delinquent loans by GSEs may increase following a December 24th announcement that the US Treasury Department is raising GSE portfolio caps, adding to an “impressive” tightening trend across MBS spread sectors, according to Credit Suisse. The spread of MBS basis to Treasuries is now at 60 bps and should remain tight or potentially move tighter in the near-term. Write to Diana Golobay. The author holds no relevant investment positions.