Mortgages Backed by Fannie/Freddie Far Superior to Private Label

September 14, 2010 No Comments »

quality

The Federal Housing Finance Agency (FHFA) released data yesterday on Fannie Mae and Freddie Mac, comparing credit quality and performance of the loans they acquired (from 2001-2008) versus loans financed with private-label mortgage-backed securities.

As you can see, Fannie and Freddie’s loans were of much better quality, and performance followed suit.

Of course, because they held a much larger share of the mortgage market (and ignored risks), multi-billion dollar losses at the two firms still required a major bailout.

Fannie and Freddie:

84% of mortgages had Fico scores above 660
5% of mortgage had Fico scores below 620 (subprime by definition)
82% of mortgages had loan-to-value (LTV) ratios below 80 percent
88% of mortgages fixed-rate loans
Roughly 5% of fixed-rate mortgages and 10% of ARMs over 90 days delinquent before the end of 2009

Private Label:

47% of mortgages had Fico scores above 660
32% of mortgage had Fico scores below 620 (subprime by definition)
66% of mortgages had loan-to-value (LTV) ratios below 80 percent
70% of mortgages adjustable-rate mortgages
Roughly 20% of fixed-rate mortgages and 30% of ARMs over 90 days delinquent before the end of 2009

And most private label mortgages were only under 80 percent LTV because they had corresponding second mortgages to avoid paying mortgage insurance (combo loans).

The layered risk you see in the private label mortgages explains why things went so horribly wrong (what caused the mortgage crisis).

Fannie and Freddie’s share of total loans fell from above 90 percent in 2001 and 2002 to just above 60 percent in 2005, before rising to nearly 100 percent in 2008.

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