Mortgage repurchaser Fannie Mae has purchased or guaranteed $310 billion in Alt-A loans, or 12 percent of the company’s single-family mortgage book of business, the company said in releasing its 2006 results.
Alt-A loans are those with reduced documentation requirements or other features that make them riskier than prime loans, but which have performed better than subprime loans.
Many lenders are experiencing problems financing Alt-A because investors who buy mortgage-backed securities have cut back on such investments because of fears about the housing and mortgage lending markets.
Fannie Mae’s sister company, Freddie Mac, announced this week it would address the issue by giving experienced lenders 90-day commitments to buy their Alt-A loans, enabling borrowers to lock in rates.
Fannie Mae officials said they believe the Alt-A loans they guarantee have “more favorable credit characteristics than the overall market of Alt-A loans,” because the loans must comply with Fannie’s guidelines, and are originated by lenders who specialize in prime loans.
Fannie said about 1 percent of its $310 billion Alt-A book was “seriously delinquent” as of June 30, but that the guarantee fees on such loans are higher to compensate for increased risk.
“Our Alt-A loans are currently performing consistent with expectations used in establishing our guaranty pricing,” the company said in a statement to investors.
The average Alt-A loans held or guaranteed by Fannie amounts to $172,545, with average FICO scores of 720 and 64 percent loan-to-value ratios.
Fannie also said it held $5.1 billion of subprime loans or mortgage-backed securities (MBS) backed by subprime loans as of June 30. While the serious delinquency rate on those loans was 4.8 percent, 88 percent carried credit enhancements, the company said.
Fannie reported an additional $47.2 billion investment in private-label securities backed by subprime loans, with 99 percent rated AAA and none subjected to downgrades by ratings agencies.
Other aspects of Fannie’s business that could be sensitive to declines in home prices or regional unemployment include loans with low FICO scores.
Some 5 percent of Fannie’s conventional single-family mortgage book of business involves loans to borrowers with FICO scores of less than 620 — one commonly used definition of a subprime loan. But 92 percent of the loans are fixed-rate — meaning borrowers won’t be subject to payment shocks involved with adjustable-rate loans — and the average loan-to-value ratio was 64 percent.
Nearly 10 percent of Fannie’s conventional single-family mortgage book of business carried original loan-to-value ratios of more than 90 percent, but the weighted average mark-to-market LTV has dropped to 83 percent on average. About 93 percent of those loans are fixed-rate, and 91 percent carry credit enhancements.
Many of the mortgages with LTV ratios of greater than 90 percent and FICO scores of less than 620 were loans designed to help Fannie achieve affordable housing goals set by the U.S. Department of Housing and Urban Development, the company said. Most of those loans were underwritten using Desktop Underwriter software, and were primarily full-documentation, fixed-rate loans with no prepayment penalties.
Fannie provided the information on its riskiest investments as part of a briefing to investors on 2006 results. The company said it made $4.1 billion in profits in 2006, down from 6.3 billion in 2005.
The mortgage credit book of business grew 7.2 percent to $2.5 trillion, while market share of single-family mortgage-related securities issuance increased in each quarter of 2006, reaching 24.7 percent in the fourth quarter.
Fannie said a slowdown in home-price appreciation helped drive up losses on its loan guarantee contracts to $439 million in 2006, compared with $146 million in 2005. Losses incurred at the inception of guaranty contracts are expected to more than double in 2007, Fannie officials said, because of declining home prices and continued investment in loans required to meet affordable housing goals.
Credit-related expenses increased by $355 million to $783 million in 2006 as Fannie boosted provisions for credit losses and faced greater expenses for foreclosed properties. An increase in charge-offs in the second half of 2006 drove up the provision for credit losses by $148 million in 2006, while foreclosed property expense was $194 million, compared with a $13 million gain in 2005.
The cost of insurance related to increased purchases of Alt-A and subprime loans helped drive up noninterest expenses increased by $156 million in 2006, to $405 million.
Fannie estimates that if home prices were to fall 5 percent overnight, it would face $1.96 billion in losses, after taking into account credit enhancements on its investments.
All in all, Fannie expects its credit loss ratio to grow from 2.7 basis points in 2006 to between 4 and 6 basis points in 2007 — which is in line with its normal historical range, the company said.
Fannie expects growth in its book of business to exceed growth of U.S. residential mortgage debt in 2007, as borrowers refinance into longer-term fixed-rate mortgage loans.
“So far in 2007, our overall book of business is growing faster than the overall mortgage market, as demand grows for the more traditional products that make up the overwhelming majority of our book,” Fannie Mae President and Chief Executive Officer Daniel Mudd said in a statement. “While we do expect our credit loss ratio to increase in 2007 from continuing strain in the housing market, we believe Fannie Mae is well-positioned to weather the turmoil in the mortgage market.”