As Fannie Mae and Freddie Mac continue in one of their stated missions – reducing taxpayer risk through the offering of credit risk-sharing deals – the performance of the risk-sharing mortgage bonds remains strong, Fitch Ratings said in a new report.
The performance of the risk-sharing bonds has remained strong even as Freddie recently introduced risk-sharing deals that featured the first-loss position and the actual loss position, both of which were new risk-sharing deal structures.
According to Fitch’s report, the risk-sharing deals continue to feature strong credit characteristics, and some of the recent GSE deals even display a slight expansion of the credit box.
The weighted average FICO score of borrowers in risk-sharing deals issued in the first quarter of 2015 was 752, down from the 765 seen in the inaugural transactions issued in 2013, Fitch said in the report.
But even with the inclusion of slightly weaker borrowers, agency mortgages included in recent reference pools continue to show better credit attributes than historical averages, according to Fitch Director Sean Nelson.
“The drop in credit scores among GSE risk-sharing transactions since 2013 is notable, but the average FICOs in the most recent transactions are still 30 points higher than those seen in strong performing vintages originated prior to 2005,” Nelson said.
Fitch’s report also showed that the GSE risk-sharing bonds displayed clean performance to date – a reflection of the high credit quality of the borrowers – with only 0.3% of the borrowers in the risk-sharing deals currently delinquent.
Additionally, while the rate of repurchases, compared with credit events, has slowed as of late, both metrics make up an immaterial amount of the total pool at less than 3.0 basis points each, Fitch said.
Also, Fitch reports that prepayment speeds have averaged above 15% for loans originated within the past year and after the increase in mortgage rates in the second half of 2013.
Fitch also expects the GSE risk-sharing transactions to contribute a consistent supply to the market for the foreseeable future. The first quarter of 2015 started off strong, Fitch said, with Fannie and Freddie issuing roughly $2.3 billion, surpassing the total issuance from 2013. Roughly $10.8 billion was issued in 2014.
Recently, Freddie upsized STACR Series 2015-DNA1, which was the first risk-sharing deal to feature the actual loss position. Freddie cited market demand as it increased the deal from $720 million to $1.01 billion.
"We see actual loss-based risk transfer as more sustainable over the long run than calculated loss risk transfer deals, and we are very happy with the initial positive demand from investors," Mike Reynolds, Freddie Mac vice president of credit risk transfer, said recently. "We look forward to integrating actual loss into future transactions."
