An up-close analysis of Freddie Mac’s loan-level data may prove critical when ratings giants like Kroll Bond Ratings consider some of the risk-sharing securitizations the enterprises could issue in the future.
The ‘risk-sharing’ securitizations Kroll has in mind would essentially allow private investors to take a stake in some of the credit risk tied to pools of agency mortgages, Kroll analysts Steve McCarthy and Glenn Costello wrote in their research report.
Keeping this in mind, the analysts delved into Freddie Mac’s loan-level data to outline mortgage characteristics and underlying risks associated with both agency and private-lable mortgages.
The data released by Freddie is comprised of fully documented, fully-amortizing 30-year, fixed-rate mortgages tied to single-family properties.
The coverage area includes a total of 15.7 million mortgages with origination dates stretching as far back as 1999, with an end date of 2011.
The total origination balance of the Freddie loans studied reached $2.7 trillion.
These loans were then compared to data from the private residential mortgage-backed securities market. On its face, the study is not an apples-to-apples type of comparison.
“Given that the current private residential mortgage-backed securities (RMBS) market for newly originated mortgage loans consists primarily of prime jumbo mortgages, we also compare the performance of these loans to the Freddie Mac sample,” the two analysts wrote. “In KBRA’s view, it is important to understand the applicability of existing residential mortgage credit analytics to agency mortgages.”
Despite distinct differences in the types of loans studied, Costello and McCarthy concluded that “the credit performance of jumbo prime mortgages and Freddie Mac mortgages is comparable when controlling for characteristics such as FICO, LTV, balance, and income and asset documentation.”
The data shows Freddie Mac default rates and loss rates remained higher among the 2007 vintage set – a string of loans that felt the negative impact of home price declines in excess of 18%.
However, Freddie Mac’s liquidation rates improved dramatically as underwriting guidelines became more stringent. It’s liquidation rate fell from 8.3% for the 2008 vintage to 0.9% for the 2009 set.
Due to stronger financial resources backing today’s jumbo loans in the private-label market, Kroll said it’s not unusual to see super jumbo borrowers outperform the typical Freddie Mac loan studied. However, when controlling the data set to account for differences, the credit risk between both products is somewhat similar, the Kroll analysts noted.
“This strongly suggests that the credit analysis tools developed for analyzing jumbo prime loans can be productively applied to agency mortgages,” the researchers concluded.