Fannie, Freddie low-mod mortgages doing better than expected: Fitch

The credit risk transfer market's growing concentration of low down payment mortgages made to low-to-moderate income homebuyers might not be as much of a concern as originally anticipated, according to Fitch Ratings.

So far, for the 2018 credit risk transfer vintage, the expected delinquencies for these loans relative to other high LTV mortgages included in those deals is 28 basis points lower than Fitch's projections, while for the 2017 vintage, it is 20 basis points lower.

"While the performance history is limited, the early delinquency behavior indicates the increase in credit enhancement on Fitch-rated GSE risk-transfer classes is sufficient to offset the higher risk of the loan programs," Court Lake and Harper Williams, senior analysts at Fitch, said in a report.

"Freddie Mac's Home Possible and Fannie Mae's HomeReady program loans, which first appeared in GSE risk-transfer offerings in 2016 for Freddie Mac and 2017 for Fannie Mae, now make up more than 20% of the reference mortgage pools in recent high loan-to-value bond issues. The rapid increase of the program concentration has negatively affected reference pools' credit composition and increased credit risk."

Last year HomeReady mortgages made up 20% of Fannie Mae CRTs, up from 15.5% in 2017 and 5% in 2016. For Freddie Mac's Home Possible program, they were 26% of that company's 2018 CRT deals, compared with 19.7% in 2017, 7% in 2016 and 0.5% in 2015.

Borrowers in these programs typically have weaker credit attributes compared with other mortgagors in high LTV GSE programs. These include lower credit scores, lower property values and higher debt-to-income ratios, all of which increases Fitch's default and loss projections relative to the other loans in the pool.

"The programs are aimed primarily at borrowers with incomes below the area median income and offer increased underwriting flexibility with down payment and income sources. The credit effect of flexible funding sources, if any, is difficult to assess because of the lack of historical performance data on loans with these specific features," Fitch said.

While Home Possible and HomeReady loans have higher delinquency rates compared with other high LTV mortgages included in credit risk transfer issuances, "the relative difference in delinquencies to date is less than Fitch initially expected," the report said.

"On average, Fitch initially projected defaults to be over 1.5 times higher for loans in the affordable lending programs relative to other high LTV GSE loans, which increased the credit enhancement on Fitch-rated classes," Lake and Williams said. "Actual delinquencies are 1.4 times higher for the 2017 vintage and 1.25 times higher for the 2018 vintage, which provides an early indication the programs do not carry risk that is not captured by traditional credit attributes. The increase in credit enhancement is more than sufficient, thus far, to offset the increase in credit risk."