A quirk in Fannie Mae's charter allows the government-sponsored enterprise to purchase loans with an LTV ratio over 80 percent, fueling speculation that the GSE may be facing additional risk as insured mortgage losses mount, according to a story published Wednesday morning by TheStreet.com. From the story:
There are a few looming questions regarding Fannie Mae's exposure to the private mortgage insurers. One is whether Fannie Mae has adequately reserved for possible losses, because the company operates with the understanding that the insurers will pay it back. The other issue is that if one of these insurers takes a massive hit, then Fannie Mae's underwriting standards may come under scrutiny, and the firm may be forced into buying fewer high-LTV mortgages in the future.
Fair questions, all, in light of MGIC's disclosure yesterday that it faces $1.3 billion in paid losses for the fourth quarter alone, and that it expects rising defaults, lower cure rates, and greater loss severity to continue to affect claims payments well into 2008. This is, in many ways, sort of the whole-loan corollary to the counterparty risk that investment banks are now having to face in regards to bond insurers like ACA Capital and Ambac Financial (and, perhaps, MBIA). What's less known, however, is the degree of risk that's been taken on at major mortgage insurers. A review of Fannie Mae's most recent 10-K says that $272.1 billion of loans in the GSE's portfolio or underlying MBS it issued were covered by primary mortgage insurace -- that's 12 percent of the entire single-family mortgage book of business at the end of 2006. Pool mortgage insurance covered $106.6 billion of single-family loans, according to the filing. High LTV is in many ways the new subprime, at least in that it's now become area of concentrated credit risk as housing prices continue to fall. "Today, as a higher percentage of people own homes and many of them have taken on 'too much house' or high LTV loans, things are different," CIBC analyst Meredith Whitney is cited as saying in TheStreet.com's coverage. "Many previously considered 'prime' customers who took on 80+% LTVs are performing closer to sub-prime loans." Disclosure: The author held numerous put options on PMI, a large mortgage insurer, at the time this post was published; no positions in FNM or MTG.