Low MI No Problem: Analyzing the Historical Performance of Home Affordable Loans
In our last CRT Deal Monitor post, we touched on a trend we have noticed- that the number of loans being originated with less-than-standard MI coverage has been increasing. This is a trend we will be covering in a series of blog posts. The following analysis provides a historical view of the performance of loans with less than standard MI coverage, like those being originated through the Fannie Mae HomeReady and Freddie Mac HomePossible programs. Fannie Mae CAS Deals contain a steadily growing percent of UPB in the HomeReady program. While Freddie Mac does not currently include a HomePossible indicator we suspect the same trend is occurring. In the coming months Freddie Mac will add this disclosure enhancement and we will investigate.
Historical data indicates that these HomeReady loans perform just as well, if not better, than similar loans not in an affordability program (see appendix for the cohort definitions). However, this trend appears to be shifting as newer vintages with standard MI have experienced less (albeit slightly) losses than their HomeReady counterparts, though there is significantly less performance history available. The table below shows the cumulative default rate for each vintage segmented by LTV cutoffs for the HomeReady Program.
The plots below present a profile of Fannie Mae HomeReady and Standard MI cohorts via the distributions of UPB, LTV, FICO, and DTI dating back to 1999. The cohorts are similar, though the Standard MI cohort does present a slightly better credit profile. The Standard MI cohort contains more loans with <= 95% LTV, slightly higher FICOs, slightly lower DTIs, and higher average loan sizes.
All plots in this post are interactive:
- Click and drag in any of the plots to zoom on a region.
- Isolate groups by double clicking on the legend entries, and single click to add groups back in.
Cohort Characteristics Plots:
To compare performance through time each cohort has been grouped by Vintage. The plot below shows the cumulative default rate based on months from origination for each Vintage MI cohort. Based on the data, the older HomeReady population has experienced a lower overall default rate vs. the same vintage with Standard MI. This effect is exaggerated for vintages originated immediately preceding the crisis and is observed consistently through 2011.
Unsurprisingly, since the Low MI cohorts experienced a lower overall default rate, they also experienced a lower cumulative net loss which is displayed for each vintage on hover. Select a single vintage from the dropdown menu or isolate vintage(s) by clicking the lines or legend.
Cumulative Default Rate Plot:
Since the HomeReady population is characterized by having less than standard MI, we should expect this population to have a higher loss severity. This relationship is seen in the data and is most prominent from the 2005 vintage onward. With the exception of the 2011 vintage, the gap between severity for Low and Standard MI has grown stronger through time.
Cumulative Severity Plot:
In the next installment of this series we will cover specific loss characteristics for the HomeReady and Standard MI populations, and discuss the impact of Borrower Area Median Income, which is an eligibility requirement for the HomeReady population.
Cohort Selection Criteria:
For this analysis, the historical performance of two cohorts ‘Low MI’ and ‘Standard MI’ were pulled from RiskSpan’s Edge Platform from the Fannie Mae Loan Performance Dataset. The cohorts contain approximately 800,000 and 2,1M loans respectively. The cohorts were established based on the current MI coverage requirements set by Fannie Mae, and were limited to loans with LTV > 90.1%. The matrix below shows MI coverage requirements for the HomeReady (Low MI) cohort and Standard MI cohort.
Cohort 1 – Low MI Coverage:
Cohort 2 – Standard MI Coverage: