Tag Archives: loan-level

Frannie v. Private-Label Smackdown

Posted on by

Eric Armstrong

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?

S&P on Risky Reps and Warranties

Posted on by

Standard & Poor’s posted New Players In The RMBS Market Could Present Unique Representations And Warranties Risks. It opens, S&P

believes that new entrants into the residential mortgage-backed securitization (RMBS) market that make loan-level representations and warranties (R&Ws) may present additional risks not present with more established market players. Many of these new entrants not only lack historical loan performance data, but have not yet established track records for remedying any R&W breaches. This can call into question their ability or willingness to repurchase under R&W provisions. In light of this, mitigating factors may exist that could alleviate the risk of a potential R&W breach. (1)

This all sounds pretty serious, but I am not so sure that it is.

S&P explains its concerns further:

We believe it is important for investors and other market participants to evaluate the quality and depth of various factors that mitigate the risk of R&W breaches occurring in U.S. RMBS transactions, including those that would be remedied by new entities with limited histories and the risk that comes with their willingness or ability to do so. Specifically, we believe the quality and scale of third-party due diligence, the depth of operational reviews, and a transaction’s overall expected losses, are critical for assessing the risk of a breach and if a new entity would be remedying it. We consider all of these aspects in our assessment of the credit characteristics of loans that are securitized in U.S. RMBS deals. (1)

One assumes that every party to every transaction would consider the counterparty risk — the risk that the other side of a deal won’t or can’t make good on its obligations. Regular readers of this blog also know that many well-known companies have attempted to avoid their responsibilities pursuant to reps and warranties clauses. So, when S&P states that “the quality and scale of third-party due diligence, the depth of operational reviews, and a transaction’s overall expected losses, are critical for assessing the risk of a breach and if a new entity would be remedying it,” one wonders why this is more true for new players than it is for existing ones.

Further undercutting itself, this report notes that “post-2008 issuers have been addressing many of these potential R&W risks, including newer players. The level of third-party due diligence in recently issued U.S. RMBS for example has been more comprehensive from a historical (pre-2008) perspective in terms of the number of loans reviewed and the scope of the reviews.” (1)

So I am left wondering what S&P is trying to achieve with this report. Are they really worried about new entrants to the market? Are they signalling that they will take a tough stance on lowering due diligence standards as the market heats up? Are they favoring the big players in the market over the upstarts? I don’t think that this analysis stands up on its own legs, so I am guessing that there is something else going on.  If anyone has a inkling as to what it is, please share it with the rest of us.

Social Security Numbers for Mortgages

Posted on by

McCormick and Calahan have posted Common Ground: The Need for a Universal Mortgage Loan Identifier, a Department of the Treasury Office Financial Research Working Paper (#0012). They argue that

The U.S. mortgage finance system is a critical part of our nation’s financial system, representing 70 percent of U.S. household liabilities. It is also highly complex, with many finance channels, participants, and regulators. The data produced by this system reflect that complexity; unfortunately, no single identifier exists to link the major loan‐level mortgage datasets. The establishment of a single, cradle‐to‐grave, universal mortgage identifier that cannot be linked to individuals using publicly‐available data would significantly benefit regulators and researchers by enabling better integration of the fragmented data produced by the U.S. mortgage finance system. Such an identifier could additionally serve as the foundation of a system that could benefit private market participants, as long as such a system protected individual privacy. (1)

This is a very important initiative, although the privacy concerns are very important to address. Regulators have been many steps behind the private sector in tracking developments in the mortgage markets and a cradle-to-grave identifier, like a Social Security Number for an individual, will help them (and private sector analysts for that matter) to track patterns among  borrowers and loan products.

The authors identify a number of serious privacy concerns:

a mortgage identifier would have to be designed to prevent market participants from re‐identifying individuals. No links from public documents to mortgage identifiers should be allowed. Otherwise the identifier could be used to identify individuals, rendering all datasets containing the identifier personally‐identifiable information. Such a designation would create concerns about the use of individual data in the private sector and trigger burdensome requirements for government researchers using the data. (3)

Researchers have proven resourceful at mashing up data sets to identify supposedly anonymous individuals, so the privacy protections that are ultimately implemented would need to be airtight. That being said, there is a lot of value in working toward the goal of a universal identifier.

CFPB’s Regulatory Agenda — Collect More Data!

Posted on by

The Consumer Financial Protection Bureau has published its Semiannual Regulatory Agenda in the Federal Register.  Of note are amendments to the Home Mortgage Disclosure Act’s Regulation C. These amendments are in the prerule stage.  The Agenda states that HMDA

requires certain financial institutions to collect and report information in connection with housing-related loans and applications they receive for such loans. The amendments made by the Dodd-Frank Act expand the scope of information relating to mortgage applications and loans that must be compiled, maintained, and reported under HMDA, including the ages of loan applicants and mortgagors, information relating to the points and fees payable at origination, the difference between the annual percentage rate associated with the loan and benchmark rates for all loans, the term of any prepayment penalty, the value of real property to be pledged as collateral, the term of the loan and of any introductory interest rate for the loan, the presence of contract terms allowing non-amortizing payments, the origination channel, and the credit scores of applicants and mortgagors. The Dodd-Frank Act also provides authority for the CFPB to require other information, including identifiers for loans, parcels, and loan originators. The CFPB expects to begin developing proposed regulations concerning the data to be collected and appropriate format, procedures, information safeguards, and privacy protections for information compiled and reported under HMDA. The CFPB may consider additional revisions to its regulations to accomplish the purposes of HMDA. (1243)

While esoteric for most, this is an important development. The lending industry collects lots of loan-level data. But that data is very expensive to access for academic and policy researchers. Improved loan-level data will better allow government agencies and researchers to study the mortgage market in a timely way. This will allow them (hopefull!) to identify unsustainable and predatory developments more quickly.

In another effort relevant to the mortgage market, the CFPB also noted that it “is continuing rulemaking activities that will further establish the Bureau’s nonbank supervisory authority by defining larger participants of certain markets for consumer financial products and services. Larger participants of such markets, as the Bureau defines by rule, are subject to the Bureau’s supervisory authority.” (1242)