This analysis tracks several metrics related to deal performance and credit profile, putting them into a historical context by comparing the same metrics for recent-vintage deals against those of ‘similar’ cohorts in the time leading up to the 2008 housing crisis. You’ll see how credit metrics are trending today and understand the significance of today’s shifts in the context of historical data.

Some of the charts in this post have interactive features, so click around! We’ll be tweaking the analysis and adding new metrics in subsequent months. Please shoot us an email if you have an idea for other metrics you’d like us to track.

Highlights

  • Performance metrics signal steadily increasing credit risk, but no cause for alarm.
    • We’re starting to see the hurricane-related (2017 Harvey and Irma) delinquency spikes subside in the deal data. Investors should expect a similar trend in 2019 due to Hurricane Florence.
    • The overall percentage of delinquent loans is increasing steadily due to the natural age ramp of delinquency rates and the ramp-up of the program over the last 5 years.
    • Overall delinquency levels are still far lower than historical rates.
    • While the share of delinquency is increasing, loans that go delinquent are ending up in default at a lower rate than before.
  • Deal Profiles are becoming riskier as new GSE acquisitions include higher-DTI business.
    • It’s no secret that both GSEs started acquiring a lot of high-DTI loans (for Fannie this moved from around 16% of MBS issuance in Q2 2017 to 30% of issuance as of Q2 this year). We’re starting to see a shift in CRT deal profiles as these loans are making their way into CRT issuance.
    • The credit profile chart toward the end of this post compares the credit profiles of recently issued deals with those of the most recent three months of MBS issuance data to give you a sense of the deal profiles we’re likely to see over the next 3 to 9 months. We also compare these recently issued deals to a similar cohort from 2006 to give some perspective on how much the credit profile has improved since the housing crisis.
    • RiskSpan’s Vintage Quality Index reflects an overall loosening of credit standards–reminiscent of 2003 levels–driven by this increase in high-DTI originations.
  • Fannie and Freddie have fundamental differences in their data disclosures for CAS and STACR.
    • Delinquency rates and loan performance all appear slightly worse for Fannie Mae in both the deal and historical data.
    • Obvious differences in reporting (e.g., STACR reporting a delinquent status in a terminal month) have been corrected in this analysis, but some less obvious differences in reporting between the GSEs may persist.
    • We suspect there is something fundamentally different about how Freddie Mac reports delinquency status—perhaps related to cleaning servicing reporting errors, cleaning hurricane delinquencies, or the way servicing transfers are handled in the data. We are continuing our research on this front and hope to follow up with another post to explain these anomalies.

The exceptionally low rate of delinquency, default, and loss among CRT deals at the moment makes analyzing their credit-risk characteristics relatively boring. Loans in any newly issued deal have already seen between 6 and 12 months of home price growth, and so if the economy remains steady for the first 6 to 12 months after issuance, then that deal is pretty much in the clear from a risk perspective. The danger comes if home prices drift downward right after deal issuance. Our aim with this analysis is to signal when a shift may be occurring in the credit risk inherent in CRT deals.

Many data points related to the overall economy and home prices are available to investors seeking to answer this question. This analysis focuses on what the Agency CRT data—both the deal data and the historical performance datasets—can tell us about the health of the housing market and the potential risks associated with the next deals that are issued.

Current Performance and Credit Metrics

Delinquency Trends

The simplest metric we track is the share of loans across all deals that is 60+ days past due (DPD). The charts below compare STACR (Freddie) vs. CAS (Fannie), with separate charts for high-LTV deals (G2 for CAS and HQA for STACR) vs. low-LTV deals (G1 for CAS and DNA for STACR). Both time series show a steadily increasing share of delinquent loans. This slight upward trend is related to the natural aging curve of delinquency and the ramp-up of the CRT program. Both time series show a significant spike in delinquency around January of this year due to the 2017 hurricane season. Most of these delinquent loans are expected to eventually cure or prepay.

For comparative purposes, we include a historical time series of the share of loans 60+ DPD for each LTV group. These charts are derived from the Fannie Mae and Freddie Mac loan-level performance datasets. Comparatively, today’s deal performance is much better than even the pre-2006 era.

You’ll note the systematically higher delinquency rates of CAS deals. We suspect this is due to reporting differences rather than actual differences in deal performance. We’ll continue to investigate and report back on our findings.

Delinquency Outcome Monitoring

While delinquency rates might be trending up, loans that are rolling to 60-DPD are ultimately defaulting at lower and lower rates. The tables below track the status of loans that were 60+ DPD. Each bar in the chart represents the population of loans that were 60+ DPD exactly 6 months prior to the x-axis date.

Over time, we see growing 60-DPD and 60+ DPD groups, and a shrinking Default group. This indicates that a majority of delinquent loans wind up curing or prepaying, rather than proceeding to default.

The choppiness and high default rates in the first few observations of the data are related to the very low counts of delinquent loans as the CRT program ramped up.

The following table repeats the 60-DPD delinquency analysis for the Freddie Mac Loan Level Performance dataset leading up to and following the housing crisis. (The Fannie Mae loan level performance set yields a nearly identical chart.) Note how many more loans in these cohorts remained delinquent (rather than curing or defaulting) relative to the more recent CRT loans.

https://plot.ly/~dataprep/30.embed

Vintage Quality Index

RiskSpan’s Vintage Quality Index (VQI) reflects a reversion to the looser underwriting standards of the early 2000s as a result of the GSEs’ expansion of high-DTI lending. RiskSpan introduced the VQI in 2015 as a way of quantifying the underwriting environment of a particular vintage of mortgage originations. We use the metric as an empirically grounded way to control for vintage differences within our credit model.

While both GSEs increased high-DTI lending in 2017, it’s worth noting that Fannie Mae saw a relatively larger surge in loans with DTIs greater than 43%. The chart below shows the share of loans backing MBS with DTI > 43. We use the loan-level MBS issuance data to track what’s being originated and acquired by the GSEs because it is the timeliest data source available. CRT deals are issued with loans that are between 6 and 20 months seasoned, and so tracking MBS issuance provides a preview of what will end up in the next cohort of deals.

Deal Profile Comparison

The tables below compare the credit profiles of recently issued deals. We focus on the key drivers of credit risk, highlighting the comparatively riskier features of a deal. Each table separates the high-LTV (80%+) deals from the low-LTV deals (60%-80%). We add two additional columns for comparison purposes. The first is the ‘Coming Cohort,’ which is meant to give an indication of what upcoming deal profiles will look like. The data in this column is derived from the most recent three months of MBS issuance loan-level data, controlling for the LTV group. These are newly originated and acquired by the GSEs—considering that CRT deals are generally issued with an average loan age between 6 and 15 months, these are the loans that will most likely wind up in future CRT transactions. The second comparison cohort consists of 2006 originations in the historical performance datasets (Fannie and Freddie combined), controlling for the LTV group. We supply this comparison as context for the level of risk that was associated with one of the worst-performing cohorts.

The latest CAS deals—both high- and low-LTV—show the impact of increased >43% DTI loan acquisitions. Until recently, STACR deals typically had a higher share of high-DTI loans, but the latest CAS deals have surpassed STACR in this measure, with nearly 30% of their loans having DTI ratios in excess of 43%.

CAS high-LTV deals carry more risk in LTV metrics, such as the percentage of loans with a CLTV > 90 or CLTV > 95. However, STACR includes a greater share of loans with a less-than-standard level of mortgage insurance, which would provide less loss protection to investors in the event of a default.

Low-LTV deals generally appear more evenly matched in terms of risk factors when comparing STACR and CAS. STACR does display the same DTI imbalance as seen in the high-LTV deals, but that may change as the high-DTI group makes its way into deals.

Deal Tracking Reports

Please note that defaults are reported on a delay for both GSEs, and so while we have CPR numbers available for August, CDR numbers are not provided because they are not fully populated yet. Fannie Mae CAS default data is delayed an additional month relative to STACR. We’ve left loss and severity metrics blank for fixed-loss deals.

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