October 29, 2015
Frannie v. Private-Label Smackdown
S&P posted a report, Historical Data Show That Agency Mortgage Loans Are Likely to Perform Significantly Better Than Comparable Non-Agency Loans. The overview notes,
- We examined the default frequencies of both agency and non-agency mortgage loans originated from 1999-2008.
- As expected, default rates for both agencies and non-agencies were higher for crisis-era vintages relative to pre-crisis vintages.
- The loan characteristics that were the most significant predictors of default were FICO scores, debt-to-income (DTI) ratios, and loan-to-value (LTV) ratios.
- Agency loans performed substantially better than nonagency loans for all vintages examined. The default rate of agency loans was approximately 30%-65% that for comparable non-agency loans, whether analyzed via stratification or through a logistic regression framework. (1)
This is not so surprising, but it is interesting to see the relative performance of Frannie (Fannie & Freddie) and Private-Label loans quantified and it is worth thinking through the implications of this disparity.
S&P was able to do this analysis because Fannie and Freddie released their “loan-level, historical performance data” to the public in order to both increase transparency and to encourage private capital to return to the secondary mortgage market. (1) Given that the two companies have transferred significant credit risk to third parties in the last few years, this is a useful exercise for potential investors, regulators and policymakers.
It is unclear to me that this historical data gives us much insight into future performance of either Frannie or Private-Label securities because so much has changed since the 2000s. Dodd-Frank enacted the Qualified Mortgage, Ability-to-Repay and Qualified Mortgage regimes for the primary and secondary mortgage market and they have fundamentally changed the nature of Private-Label securities. And the fact that Fannie and Freddie are now in conservatorship has changed how they do business in very significant ways just as much. So, yes, old Frannie mortgages are likely to perform better, but what about new ones?| Permalink