CRT Deal Monitor: March 2019 Update
CRT Deal Monitor: Understanding When Credit Becomes Risky
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.
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.
A trend we have been seeing in the data is an increased share of loans with less-than-standard MI coverage. We define less-than-standard MI as loans with high LTV (over 80%), but less than expected MI coverage. As an example: a loan with an LTV of 95% and MI coverage below 25% would be included in our less-than-standard cohort. Newly issued loans have eclipsed the 2006 vintage in share of loans with low MI coverage, and this is reflected in the composition of newly originated CRT deals.
While some market participants are worried about the increased prevalence of these loans, our analysis shows that they historically have performed as well (or even better) than High LTV loans with Standard MI coverage. An analysis of Fannie Mae loans shows that loans in the HomeReady Program (LTV > 95%; MI Coverage <= 25%; FICO >=620) perform better than other high LTV loans (LTV > 95%; MI Coverage > 25%; FICO>=620), specifically in loan vintages hit the hardest by the financial crisis. In the charts below, we display cumulative defaulted principal and cumulative loss percentages, having controlled for FICO by dividing both groups into high and low FICO cohorts; high FICO is defined as FICO >= 680, which aligns with improved pricing in the HomeReady program.
Driven by higher defaulted balance percentages, Non-HomeReady loans experienced higher loss percentages, despite their standard levels of MI coverage, than their HomeReady counterparts. For both the high and low credit score cohorts, HomeReady loans outperformed Non-HomeReady loans for all pre-crisis and crisis Vintages. This performance difference is somewhat unexpected and suggests that the application process for the HomeReady program must control for factors beyond those captured by credit score alone. We plan to investigate this performance discrepancy more, but on first blush it appears that investors should not be concerned by the increasing prevalence of less-than-standard MI loans, as they outperform other high LTV loans.
Deal Tracking Reports:
Please note that defaults are reported on a delay for both GSEs, and so while we have CPR numbers available for the most recent month, 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.
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.
Current Performance and Credit Metrics
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).
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.
Low LTV Deals 60 DPD:
High LTV Deals 60 DPD:
Delinquency Outcome Monitoring:
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.
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.
STACR 6 Month Roll:
CAS 6 Month Roll:
The table below 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.