Freddie Mac-No Politics (FMCC)

[FFFacts]

A little color from TH on CRT from last night: "What’s missing, though, is the economic context. These are mortgages that carry private mortgage insurance, which significantly reduces their loss severity on default. Fannie publishes data on recent annual default rates and loss severities for these loans in its Connecticut Avenue Securities Investor Presentations. In the January 2021 version of this publication, it says that for its five most recent origination years that have enough loss data to be meaningful—2012 through 2016—the average annual default rate for loans with LTVs over 80 percent and up to 97 percent has been 0.2 percent, and their average annual loss severity has been 0.11 percent. That’s an annual credit loss rate of 2 basis points per year. It would take 30 years of credit losses of 2 basis points per year for the 60-basis point threshold of credit losses to be reached—at which point the mortgage insurers that are counterparties to this deal would have to begin picking up losses—and the term of the insurance is only 12.5 years. On top of that, Fannie is paying for insurance for up to 375 basis points of losses, which is close to 200 years of losses at the current credit loss rate. As I noted in my current post, even in a repeat of the Great Financial Crisis the total losses on an insured pool of loans are unlikely to exceed 150 basis points of the pool balance. This deal is a giveaway to the mortgage insurers, just as similarly-structured Connecticut Avenue Securities deals are giveaways to investors.

The only reason Fannie is doing these grossly uneconomic deals is to get the capital relief FHFA is proposing to offer them. And that’s the scandal. FHFA knows the Calabria capital standard is far too onerous, but rather than reduce it, it only allows the companies to “buy it down” somewhat by issuing CIRTs or CRTs that will lose them billions of dollars in the real world, through greatly overpaying for insurance that will never pay off. And Fannie’s customers are bearing the cost of that. Shame on FHFA."

Tim Howard knows what he is talking about. CRTs have been proven to be uneconomical and a giveaway. Average person doesn't have a clue.