At the beginning of the month, Freddie Mac started releasing loan level data on newly issued pools. Analysts said that the additional information is welcome but will not have as much impact as the enhanced pool level data Freddie Mac released in mid-2003. The loan level data disclosed includes credit score, original loan amount, loan age and loan purpose, among other information. For the entire list of new disclosures, refer to ASR 09/26/05.
Art Frank, head of mortgage research at Nomura Securities, said that to determine the value of the new data, they had looked at some of the firm's own mortgage pools. "Though it is of some value for new pools to have loan level information, it's not of enormous significance," Frank said. For instance, Frank said that having loan level data could show that high LTV investor loans have more call protection compared to low LTV investor loans. He added that since this type of data is currently available in non-agencies, they had an idea of what the application and relevance would be in agency land.
Meanwhile, analysts from UBS said that although the additional data will probably not have an immediate impact on modeling, they described it "as a large step forward" in providing investors with more transparency. For instance, UBS researchers said that the added disclosure would allow analysts to identify issuers that might be selectively pooling loans with poor collateral characteristics, such as credit barbells. Although it is not clear whether these characteristics exist in Freddie Mac pools, the added disclosures will allow them to know definitely by comparing distributions of variables such as FICO and LTV across different issuers.
UBS analysts noted that a variable that is not disclosed at the pool level but will now be available at the loan level is the Third Party Origination (TPO) Flag. "We are very excited about this particular variable, because it identifies loans that were originated by a broker or wholesale channel versus loans originated through retail channels," UBS researchers said. They explained that they have long theorized that pools that have a larger percentage of broker loans have faster prepayment speeds since brokers have the incentive to assist their customers in refinancing their mortgages whenever they have enough reason to do so. So these brokers, in a sense, act as a catalyst when borrowers are even just marginally refinanceable. The TPO Flag variable will help analysts test this hypothesis.
UBS analysts added that in the long term, loan level data would help specified pool traders to further segregate the agency universe by fine tuning the pay-ups for specific collateral attributes.
In a related report, Merrill Lynch analysts examined the new data in terms of loan size distributions, correlations between loan characteristics, the pricing of risk and securitization patterns. Analysts found that although the new data is extremely useful, it also has some limitations. Specifically, it could be hard to correlate the loan level information with prepayment information, since Freddie Mac is only releasing loan level information on pools at origination. Monthly updates of this information, which are not provided, would allow analysts to identify which factors actually have the most impact on prepayment behavior.
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