Freddie Mac last month started providing monthly loan-level updates on its single-family mortgage PC securities issued after Dec. 1, 2005. Industry participants applauded the move because the increased disclosure allows for better understanding of the GSE's securities. But at the same time, others are asking for more information, specifically on the credit side.
The recently released new loan level disclosures from Freddie Mac are a positive for the mortgage market, according to officials from the agency. "It allows investors to look at each attribute individually, improving predictability, and positively impacting prepayment valuation." said Neil Hughes, director of mortgage funding at Freddie Mac. Through these loan level disclosures, Hughes said that investors could better assign value to each security by allowing them to look at these mortgages more in depth. He added that this shows that Freddie Mac recognizes the market's desire for more transparency, predictability and liquidity. The added information is also expected to improve the trading of Freddie Mac securities. "Because we're offering more information than the other agencies, we would hope that demand for our securities would increase, commanding some sort of pay up," Hughes said.
Andrew Davidson, president of Andrew Davidson and Co., said although his firm has not yet analyzed the additional data provided by Freddie Mac, "We look forward to studying the data so we could see how useful it is to our analysis of the market." But, he said that the added information would definitely help in determining the performance characteristics of individual loans. However, he would like to see more data from the GSEs, specifically in terms of refinancings to allow them to separate out the cash-out loans. Additional information on the credit performance of the loans would also be valuable.
Although Davidson had initial concerns about what the effect would be on the TBA market of the increased disclosures from the GSEs, he said that the market has learned to accommodate the new data into the TBA as well as the specified pool markets. "The market has learned how to group loans that have similar characteristics together and to look at the specified features of those pools or as TBA eligible, when necessary," Davidson explained. He said that it has become a fairly flexible market where loans could go into the TBA market from the specified pool sector.
The market could work efficiently with either little disclosure or with complete disclosure. Partial disclosure of pool information creates the greatest inefficiency. Additional information would not necessarily lead to decreased liquidity but it would just mean additional analytical work in determining the characteristics and expected performance of mortgage pools.
Citigroup and TPOs
The additional data from Freddie Mac allows for more granular loan level analysis. For instance, Citigroup Global Markets in a recent report said that the updates to Freddie Mac's at-issuance loan level data enables them to compare the at-issuance information with the August factor tape data to determine the characteristics of the loans that have prepaid. Particularly, they were interested in determining the characteristics of above-market rate premium loans that prepay early, focusing on the loans that are backing 30-year 6.5s pools. They looked at third-party origination (TPO) loans, which are mortgage broker-originated loans that have exhibited significantly faster speeds compared to non-TPO mortgages. Generally, Freddie Mac 30-year 6.5s pools that were issued since December have paid down by 4.4%, analysts said. They acknowledged that since TPO loans have higher loan sizes, at least part of the reason for faster TPO speeds is just loan size. But data presented by the firm showed that it is really a combination of high loan balance and being TPO that makes an above-market rate loan more likely to prepay early. Loan size's impact could be seen much stronger in TPO loans. The firm's data show that for all loans in 6.5% pools, TPO loans tended to have lower credit scores and higher LTVs. However, just the opposite is true for the characteristics of paid-off loans - paid-off TPO loans have a credit score/LTV of 721/73 versus 705/78 for non-TPO paid-off loans. Citgroup said that it is likely that the explanation for why the characteristics are reversed for paid-off loans compared to the population of all loans is that mortgage brokers also tend to be associated with originations of credit-impaired borrowers who do not usually prepay that quickly, at least not initially, Citigroup analysts said.
The GSE is the first agency issuer of MBS to offer loan-level detail. Freddie Mac said that with loan-level monthly updates, additional information would be available to assist investors in assessing the factors that may affect Freddie Mac mortgage security performance. This is expected to allow investors to value the securities more precisely. The company is working with mortgage-securities data providers to accommodate the monthly loan-level updates and expects that the data providers will incorporate loan-level information into their securities analysis tools, Freddie Mac said in a press release.
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