Freddie Mac was the talk of the town last week: not only from the management shake-up but also from the new disclosures that became available on June 5.
The GSE provided additional information on original LTV, FICO, loan purpose, occupancy type, property type and loan seller and servicer for all Gold pools. JPMorgan Securities said that its "preliminary analysis indicates a fairly clean data set with very few blemishes."
JPMorgan also said that the new disclosures are crucial in shedding light on the credit characteristics of MBS pools. Historically, the WAC spread at origination or the SATO were used to identify which pools are "credit-impaired" or "documentation-impaired" (i.e., Alt-A pools).These borrowers usually end up with higher rates. On the other hand, there is a set of borrowers who pay points to obtain a lower rate, causing them to have a negative SATO. Though the information on documentation level is not offered, the combination of LTV and FICO along with occupancy type and property type should help in better defining agency Alt-A pools.
In a separate report, Bear Stearns echoed JPMorgan's analysis. Bear said that FICO and original LTV are the most important new variables. The firm estimates that the new data would change theoretical valuations on 15% to 20% of the MBS universe. Bear explained that MBS backed by low FICO loans provide buysiders with a more positively convex mortgage security. With rates continuing to dip, low FICO pools should pay slower compared to the universe due to the higher refinancing transaction costs as well greater underwriting scrutiny. In contrast, when rates rise, these loans are expected to pay faster and extend less than the universe because of credit curing. Bear's key FICO threshold is 700.
In terms of its impact on prepayment speeds, LTV plays a close second to FICO. Pools with higher-than-average original LTV (LTV greater than 80%) provide investors with a trade-off between less call risk and more extension risk. Bear said that premium high LTV pools could pay 20 CPR slower than their low LTV counterparts. But their discount seasoning function should be slow due to borrowers having less home equity, making trade-ups less likely events.
Meanwhile, Fannie Mae also fulfilled its commitment to provide more detailed disclosures on Fannie Mae MBS last Thursday. The GSE started providing the same information on its new MBS last April.
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