After Fannie Mae and Freddie Mac agreed to start registering their equity issues with the Security & Exchange Commission, the regulators and other so-called "paid enemies" are now targeting the lack of disclosure with regards to the mortgage-backed securities the two agencies guaranty.
Though Fannie and Freddie are not expected to begin registering their debt securities or mortgage-backeds with the SEC, a study of disclosure requirements on agency MBS will be conducted jointly by the SEC, the Office of Federal Housing Enterprise Oversight (OFHEO), and the U.S. Department of Treasury. One goal of the study is to determine if investors need more information when purchasing agency MBS.
Last week, Street researchers said that the review will compare the differences in disclosure by the agencies with that of private label issuers, such as Countrywide Home Loans and Washington Mutual. While many analysts expect the study will find that Fannie and Freddie do not reveal as much pool data as private label issuers, the analysts suggest that regulators may find that the level of pool transparency is adequate for investors, as the deals are guarantied.
Of course, the agencies believe their pool disclosure is second-to-none.
"The disclosure that Freddie Mac provides on its mortgage-backed securities is not just adequate but it's actually best in its class," said Sharon McHale, Freddie Mac spokesperson.
Another wellpublicized attack
Resident critics of Freddie and Fannie such as Peter Wallison of American Enterprise Institute have openly complained that the GSEs do not provide enough loan level data on their MBS pools thus exposing investors to prepayment risk.
In a recent Wall Street Journal article, Wallison compared a Fannie Mae prospectus with one from Chase Mortgage Finance Trust, noting, unlike Chase, Fannie did not disclose data sets such as geographic area, mortgage size, purpose of loan, property type and loan documentation.
Representatives from the GSEs say that information on some of the items listed in the article is actually available, and the data that is not disclosed is usually credit-related.
McHale explained there are significant differences between the characteristics of private label and agency mortgage pools. Since the agencies hold the credit risk on their securities, disclosure on credit-related items is really not material unlike in private label-MBS.
She added that mortgages in private label deals have varying credit risk, underwriting, and collateral characteristics, so credit-related disclosure items are more important for investors in private-label MBS, but not as relevant for homogenous agency mortgage pools.
While the agencies do not indicate some types of data in offering documents, the GSEs do send out tapes with pool performance data, which is then processed by information providers such as Bloomberg. While missing from the prospectuses, statistics such as average note rate on the underlying loans, seasoning, year of origination and geographic concentration are available through other channels.
Further, according to some MBS investors, the data is timely and updated monthly, and has set the standard for the whole loan market.
"Anyone who thinks that there isn't a lot of information on agency mortgage pools, I don't know if they were born yesterday or they were born close to yesterday," said Steve Point, a portfolio manager at Glenmede Trust Co.
Modeling prepayment risk
Analysts are not too worried about the missing information in GSE offering documents. Still, the agencies could release more loan-level data that would make prepayment risk easier to model.
"Though it's not default risk that the investor has in agency MBS, it is in terms of prepayment risk where information about characteristics such as loan-to-value becomes helpful," said a senior mortgage analyst. "I believe it would be a benefit if this type of data was accessible to the market."
The analyst added that information on limited documentation loans would also help in estimating the percentage of Alt-A mortgages in given pools. Currently, analysts can only get this information through the originator of the loans.
In a recent report, analysts from Merrill Lynch analyzed the data that is available on Agency pools. Merrill used Wells Fargo MBS 2002-8 as a standard non-agency pool to compare information availability.
The researchers found that both agency and non-agency MBS issuers disclose information on weighted-average-coupon, weighted-average-life, weighted-average-maturity, origination year, geographic distribution, and average loan size. However, there was less information on loan size distribution and WAC distribution in the agency MBS. There were also no details available on the loan purpose, documentation levels, LTVs, FICOs and delinquency history for agency securities.
Although there is less information available on the agency pools, it is probably more relevant to default projections than for prepayment modeling. Projecting defaults is not typically an issue with agency pools because of the implicit government guarantee given them.
The firm added that though information on loan size and WAC distribution as well as FICO scores and documentation levels would be helpful in building sophisticated prepayment models, it is really not crucial in developing reasonable valuation tools. Further, Merrill pointed out that the bulk of agency mortgages are traded through the TBA market "where pool characteristics are not disclosed at the time of the trade."
As mentioned above, the GSEs are not being required to register their MBS with the SEC. This is an important point because actually registering their debt would mean compromising the homogeneity and liquidity in the TBA market. According to a UBS Warburg report, with SEC-registered securities, a sale could only occur after the registration process is complete.
"That completely plays with the idea and pragmatics of TBA trading, in which securities are sold before they are issued (forward settlement), or are sold with the seller having the right to deliver any pool with the TBA coupon," UBS researchers point out.
It is also important to note that there is a bit of a linguistics difference here. Some critics are equating the issue of the registration of agency MBS to disclosure on their pools. Having more disclosure on agency pools may not necessarily harm the TBA market, but registering agency MBS under the Securities & Exchange Act of 1993 (which covers debt registration) may do some damage because it would hinder the lenders' ability to forward sell mortgages to Fannie and Freddie.