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What is Driving the GSE Default Rate Down?

Default Notice BHThe credit quality of loans purchased by both Fannie Mae and Freddie Mac has greatly improved since 2008, thus leading to cumulative defaults for both GSEs on a pace to fall below pre-2003 levels, according to data released by the Urban Institute.

The composition of loans purchased by both GSEs has shifted toward higher FICO scores; for loans purchased by Fannie Mae, 69.2 percent of loans originated from 2011 to early 2015 were to borrowers with FICO scores higher than 750. For loans originated at the height of the housing bubble in 2007, the share purchased by Fannie Mae featuring 750-or-higher FICO borrowers was only 40.7 percent. From 1999 to 2004, it was even lower, at 36.7 percent.

Freddie Mac has experienced similar trends with the single-family residential loans it has purchased since 2008. About 64.8 percent of loans purchased by Freddie Mac that were originated between 2011 and 2015 with 750-or-higher FICO borrowers. That share shrank to 38.9 percent for loans originated in 207 and 33.3 percent for loans originated from 1999 to 2004.

“While the composition of Fannie Mae and Freddie Mac loans originated in 2007 was similar to that of 2004 and earlier vintage years, 2007 loans experienced a much higher default rate due to the sharp drop in home values in the recession,” the report stated. “Originations from 2009 and later have pristine credit characteristics and a more favorable home price environment, contributing to very low default rates.”

The result has been much lower rates of default on GSE-backed loans in the last seven years. For loans guaranteed by Fannie Mae and Freddie Mac with 1999 to 2003 vintages, the cumulative default rate was only 2 percent as of the end of March 2016, according to the Urban Institute. Conversely, the cumulative default rate on loans backed by the GSEs that were originated in 2007 was about 13 percent.

The cumulative default rate for both is on pace to fall below 2003 levels, according the Urban Institute. That rate for Fannie Mae-backed loans originated from 2009-10 is 0.76 percent, while the rate on loans originated from 2011 to the first quarter of 2015 is only 0.17 percent, compared to 0.77 percent on GSE-backed loans originated from 1999 to 2003.

For Freddie Mac, the cumulative default rate on loans insured by Freddie Mac that were originated from 2009-10 is 0.71 percent, while the rate is 0.10 percent for loans originated from 2011 to Q1 2015. For loans originated from 1999 to 2003, the cumulative default rate is 0.73, according to Urban Institute.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.
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