For a long time I was convinced that Fannie's credit criteria were slightly more stringent than Freddie's.
It appears I was wrong.
Fannie and Freddie give cumulative default curves in their latest results. The 2006 pool (which is very bad at both) has 115 points of cumulative default at Freddie and 148 points at Fannie. The cumulative default curves are pointing to the sky at both companies.
This occurs across almost all vintages.
Is there anyone knowledgeable who can explain to me why the cumulative defaults are so different between companies.
Thanks
John
A couple guesses.
ReplyDeleteFannie tended to lead in terms of relaxing criteria and Freddie would follow. That might have led to Fannie getting the first rush of crap business.
Processors have told me that Fannie's automated underwriting system was always easier to game than Freddie's.
I suspect that Fannie's sampling of loans they bought was less rigorous than Freddie's but I don't have enough experience with that to back up that claim. Maybe someone with secondary market experience could add to that one.
John,
ReplyDeleteI haven't looked closely at Fannie and Freddie in about a year, but from what I can remember Fannie was always the one that had taken on greater credit risk in both its owned and guaranteed portfolio. I believe their respective spreads on their owned portfolios suggested as much (i.e., FNM earned higher spreads than FRE for taking on more risk). I believe the same could be said of their g-fees as well (i.e., FNM earned higher guarantee fees than FRE b/c it guaranteed riskier mortgages, on average). Again, I'm running off dated memory here, but I believe Fannie also took on a much larger book of Alt-A biz relative to Freddie. As you know, a big swath of Alt-A of the '06 and '07 vintage is proving to be highly toxic. That may also help explain why Fannie is seeing credit costs/losses accelerate moreso than Freddie.
Really enjoy the blog.
I can second the anecdotes around the permissiveness of Fannie's automated underwriting.
ReplyDeleteWithout seeing the data, you may also look to see if FNM is more exposed in foreclosure hotspots like Inland CA or FL. Those areas looked like credit outperformers given their rapid appreciation rates of the last 5 years, only to give it all back in 12 months. Such is FMN's "risk management."
I'll also speculate that Fannie had a "special relationship" with the former Countrywide Financial, who I consider to be the most egregious offender of the collapse in mortgage lending standards (if only because of their scale).
Is there a link where we can see the cumulative loss data for FMN and FRE? If 2006 is bad, 2007 should come in even worse.
i have a questions for you smart guys. I work for a company that has clients who have large in-house financing programs. As a result, these clients have large accounts receivable/note receivables. In the past, they used to generate cash flow by either pledging these notes receivable to get loans from lenders or securitizing them and selling them to investors. Those days are long gone now. SInce they are our clients, we are trying to help them to obtain financing from any lenders who would lend. In that effort, we have hired a consultant to help us build cases for our clients to get capital. In return, instead of getting commission in the form of finder's fee (the consultant whom we hired would get the commission, not us), we would just get favorable terms on our existing contracts (which are unrelated to their capital raising business). The question is, when we do that, do we fall within the definition of a broker-dealer under the Exchange Act of 1934? Anyone knows?
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