Despite rising delinquency levels, borrower performance on the underlying mortgages in GSE credit-risk transfer securitizations is strong enough to warrant ratings upgrades to more than half of nearly 1,200 outstanding note classes rated by Fitch Ratings.
Fitch on Friday upgraded the ratings on 664 note tranches while affirming 494 others across dozens of CRT transactions sponsored by Fannie Mae and Freddie Mac, as part of the agency's twice-yearly surveillance on the performance of 35 Fannie Mae Connecticut Avenue Securities (CAS) transactions and 31 Freddie Mac Structured Agency Credit Risk (STACR) deals the agency rates.
The main drivers to the bond upgrades are the “strong collateral performance” resulting in lowered loss expectations on the deals, as well as rising home prices which increased an average of 2% since January’s survey of CRT deal pools, Fitch reported.
Also factoring into the upgrades are the shorter maturity window of the notes since the previous survey, and the improved loan-to-value ratios of the underlying properties securing the mortgages.
Both GSEs have issued CRT deals since 2013, stemming from a 2010 Dodd-Frank Act mandate to offset some of the taxpayer risk of government-backed mortgages with private investors. The credit-linked notes provide principal-and-interest cash flow payments to investors, but are unsecured and require noteholders to share in potential losses within a specified pool of loans linked to a STACR or CAS transaction.
(For 2019, Freddie Mac plans on eight STACR transactions, with an expected volume of $5 billion to $7 billion; Fannie has six scheduled issuance windows during the year which can include up to two CAS deals, depending on market conditions.)
“The upgrades reflect continued improvements in the relationship of credit enhancement (CE) to expected pool loss since the prior rating review in January 2019,” according to a Fitch press release.
Fitch revised downward the base-case expected losses on all the rated tranches in the CRT deals, with no deal aged more than three years exceeding 0.34% on cumulative projected losses.
The improvement in loss expectations exceeded the performance of Fitch’s prior survey six months ago. For example, Fitch reports losses at a BBB-level stress-loss scenario were reduced by an average of 31 basis points (of the remaining pool balance), compared with an average reduction of 15 basis points in January’s survey.
For note tranches to be upgraded, they must show they have sufficient credit enhancement to withstand losses at higher-stress levels under Fitch’s loan-level default models.
The upgrades occurred despite an overall increase in delinquencies, including more recent deals showing higher trajectories of delinquencies than earlier vintage deals, according to Fitch. “But performance generally remains strong and remains better than initial expectations, even for recently issued transactions,” Fitch’s report stated.
Among transactions with at least 12 months' seasoning, according to Fitch, the average 60-plus-day delinquency percentage loans with current loan-to-value ratios between 60%-80% is 0.27% — and no pool higher than 0.58%. For higher-leverage loans (81%-97% current LTV), the average is 0.49%, with the highest at 0.87%.
