Bear, Stearns & Co. is urging all issuers in all sectors of the mortgage and asset-backed markets to provide full loan-level disclosure to establish a framework for measuring default behavior of different mortgage products in a variety of scenarios.
Full loan-level disclosure on defaults and loss will help improve transparency in the subordinate mortgage-backed securities sector. Bear Stearns has recently completed a study examining how three major non-agency participants reduced loan-level loss by committing to releasing disclosure data.
Stating that a lack of detailed loan-level loss data has made the analysis of defaults and losses in the non-agency sector a challenging task for analysts, investors and rating agencies, Bear Stearns completed the first comprehensive loan-level analysis of default performance in this market.
Using the practices of Residential Funding Corp., Prudential Home Mortgage Securities Corp., and Norwest Asset Securities Corp. (now Wells Fargo Home Mortgage), Bear Stearns compiled data for loans originated between 1986 and 1999 - the entire history of the non-agency market - identifying the payoff month and reason for 99.7% of the 30-year fixed rate jumbo loans securitized by the three companies.
Before this study, "Most research on measuring the credit performance of residential subordinates has focused exclusively on the frequency of default/foreclosure aspect," the study stated, and that by focusing on loan-level data, "we have been able to bridge the gap that has prevented other market commentators from specifically being able to measure the quality of underwriting."
Hoping the study becomes a framework to monitor future performance of the non-agency sector, authors Satish Mansukhani and Bruce Kramer stated that the study is also important because, "As the GSEs expand their reach into credit-sensitive mortgage products, this study will help investors analyze opportunities in structured products that transfer risk from the GSEs to the secondary markets."
The government sponsored enterprises currently do not generally disclose their loan-level data for every issue.
For the study, Bear Stearns analyzed the Standard Default Assumption (SDA) for selections of the collateral. The SDA rates incorporate the effects of prepayments, servicer performance, home price changes, economic cycles and other factors.
The study determined that for investment-grade tranches in jumbo MBS pools to experience any loss in principal, SDA rates would have to climb to early 1990s levels. Levels experienced during this time period were the result of loose underwriting guidelines. Lenders have since raised their lending standards and losses have not been as severe since. RFC had considerably lower losses than Prudential during that time period.