Fitch: New Freddie Mac Loss Data Increases Transparency; Attributes Explain Differences

NEW YORK--()--Freddie Mac's recently disclosed loan-level loss data reveal that loss severities on liquidated Freddie Mac mortgages are higher than Prime Jumbo and lower than Alt-A non-agency loans, according to Fitch Ratings. The differences can be attributed to specific borrower attributes, such as property values, and the presence of mortgage insurance.

Freddie Mac enhanced its single family residential loan-level historical dataset on Nov. 24 by adding loan-level loss data. In doing so, Freddie Mac increased transparency to the market in anticipation of an actual loss credit offering in 2015. To date, all risk-sharing transactions have passed losses on defaulted loans to investors using a pre-determined loan loss severity schedule.

Fitch conducted an analysis of Freddie Mac's loss data and contrasted it with non-agency RMBS loss data provided by CoreLogic. The comparison focused on non-agency loans with similar characteristics to the Freddie Mac sample: fully-amortizing, 30-year, fixed rate, first lien and full documentation. Fitch found that on average, loss severities (loss amount as a percentage of loan balance) on liquidated Freddie Mac loans are generally 5-10% higher than severities on Prime jumbo non-agency liquidations, and roughly 15-20% lower than severities on Alt-A non-agency liquidations.

The main drivers of differences in loss severity include property values, mortgage insurance and interest rates. Loss severity is generally negatively correlated with property value, with higher-value properties exhibiting lower severities. Average property values of liquidated loans in the Freddie Mac dataset range from $100,000 to $300,000 since their loan balances cannot exceed the conforming limits. While the Alt-A loans analyzed have comparable property values to Freddie Mac, average values among the Prime jumbo dataset are considerably higher (ranging from $300,000 to $700,000). As such, average Prime jumbo loss severities are lower than Freddie Mac and Alt-A loans.

Private mortgage insurance (PMI) also contributes to differences in loss severity. Freddie Mac generally requires PMI for any loan with a loan-to-value (LTV) ratio over 80%. As such, there is a higher percentage of loans in the Freddie Mac loss dataset with PMI coverage than in Prime jumbo or Alt-A. Higher PMI recoveries at liquidation result in lower loss severities among Freddie Mac loans compared to Alt-A even though the two have comparable property values. Higher loss severities among Alt-A loans are also driven by interest rates. On average, interest rates on Alt-A non-agency loans are 50-100 basis points higher than rates on Freddie Mac and Prime jumbo loans. Higher interest rates lead to higher delinquent interest carry costs, and ultimately translate to lower net proceeds at liquidation.

Several drivers produce differences in loss severities among Freddie Mac and non-agency loans in the sample. That said, loss severities are comparable when the dataset is controlled for PMI, original LTV, property type and occupancy status. This indicates that the differences in historical severities can be attributed to differences in borrower attributes rather than differences in operational risk or procedure.

Fitch will continue to monitor and analyze agency loan-level datasets in preparation for an actual loss credit offering.

Additional information is available at 'www.fitchratings.com'.

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Contacts

Fitch Ratings
Grant Bailey
Managing Director
+1 212-908-0544
Fitch Ratings
33 Whitehall Street
New York, NY 10004
or
Sean Nelson
Director
+1 212-908-0207
or
Media Relations, New York
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Grant Bailey
Managing Director
+1 212-908-0544
Fitch Ratings
33 Whitehall Street
New York, NY 10004
or
Sean Nelson
Director
+1 212-908-0207
or
Media Relations, New York
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com