Kroll Bond Rating Agency Analyzes Freddie Mac HVE in STACR Transactions

NEW YORK--()--Kroll Bond Rating Agency (KBRA) has analyzed ongoing disclosures which Freddie Mac began reporting for its STACR-series credit risk transfer (CRT) transactions beginning in early 2016. This analysis joins other recent research KBRA has conducted into ongoing disclosures from both GSEs on their CRT transactions that have included items such as updated borrower credit scores, the status of mortgage insurance (MI) policies, and estimated current loan-to-value (LTV) information. KBRA’s new report focuses specifically on Freddie Mac’s periodic and ongoing reporting of loan-level estimated current LTV.

LTV ratios are among the most predictive loan characteristics for determining probability of default and expected loss for an RMBS pool. Periodically updating home values on a portfolio of homes is typically not feasible for most investors for a number of reasons including prohibitive costs, lack of property information, and limited physical access to the property. In support of their CRT issuance initiatives, Freddie Mac provides estimated current LTVs as part of the ongoing loan-level disclosure data set for each STACR transaction. The estimated current LTVs are based on values using Freddie Mac’s proprietary automated valuation model called Home Value Explorer (HVE). KBRA expects that the information will be helpful in understanding future mortgage behavior as well as STACR performance. Some noteworthy observations are as follows:

  • HVE LTVs and LTVs that have been marked-to-market using HPIs both exhibit similarly-shaped distributions, but the HVE LTV distribution has “fat tails”. These tails seem to be correlated with certain property characteristics: when HVE diverged from the original value the mortgage was nearly two times as likely to be to an investor or was approximately 50% more likely to be backed by a rural property. The values in these tails are also associated with lower HVE confidence levels.
  • HVE values that indicated significant appraisal inflation might be useful in detecting valuation exceptions on STACR mortgages. Some mortgages in STACR 2016-DNA4, for example, which were reported as having elevated HVE LTVs were repurchased due to seller violation of appraisal requirements set forth in the Seller Servicer Guide.
  • Significant quarter-over-quarter changes in LTV can be a leading indicator for prepayment activity. Loans that experienced LTV increases based on HVE of more than 5% from one quarter to the next had a 3-month CPR of close to three times that of loans with no LTV changes over the same period. Such activity might be cause by HVE picking up on property listing data.
  • If HVE is a leading indicator partially due to incorporating listing data, modelers using this information should be aware that HVE just prior to liquidation may already include distressed sale discounts, especially where HVE values drop significantly just prior to liquidation. From a subset of 40 liquidated STACR loans, final HVE values were within 10% of the gross sales proceeds of the property in 10 out of 11 cases where HVE LTV had increased more than 15% over a short period. Only two of the remaining 29 liquidated loans were within 10% and HVE LTV changes averaged -2.3%.

Additional detail is available in our full report.

About Kroll Bond Rating Agency

KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).

Contacts

Analytical:
Steve McCarthy, (646) 731-2343
Senior Director
smccarthy@kbra.com
or
Jack Kahan, (646) 731-2486
Managing Director
jkahan@kbra.com
or
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Contacts

Analytical:
Steve McCarthy, (646) 731-2343
Senior Director
smccarthy@kbra.com
or
Jack Kahan, (646) 731-2486
Managing Director
jkahan@kbra.com
or
Follow us on Twitter!
@KrollBondRating