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Credit Risk: The Highs and Lows

Mortgage credit availability increased to 5.95% in Q1 2019 according to the latest housing credit availability index (HCAI) from the Urban Institute, the highest level since 2013. The Urban Institute notes that increase was caused by an increase in risk taken in the portfolio and private-label securities channel. 

Fannie Mae and Freddie Mac credit availability has been increasing steadily as well, and Urban notes that the index reached 3.0% for the first time since 2008 in Q3 2018, and reached 3.1% in Q1 2019. Meanwhile, the government channel (FVR), which includes the Federal Housing Administration, the US Department of Veterans Affairs, and the US Department of Agriculture’s Rural Development program increased to 12.1%, the highest level since 2009. 

The GSE market has seen an expansion in the credit box for borrowers, while the downward trend of credit availability in the GSE channel began a reversal in Q2 2011. From Q2 2011 to Q1 2019, the total risk taken by the GSE channel has more than doubled, from 1.4% to 3.1%. The total default risk the government loan channel is willing to take bottomed out at 9.6% in Q3 2013, and fluctuated around that level since.  

The portfolio and private-label securities took on some of the highest risk, more than the government and GSE channels, during the bubble. After a sharp drop post-crisis, numbers have stabilized, with product risk fluctuating below 0.6% and borrower risk around 2.0% since 2013. Borrower risk increased in the Q1 2019, reaching 3.1%, driven primarily a decline in FICO scores and an increase in high-LTV lending.

To mitigate GSE risk, Fannie Mae recently announced that it has secured commitments for two new front-end Credit Insurance Risk Transfer (CIRT) transactions of 2019. The two front-end deals, CIRT FE 2019-1 and CIRT FE 2019-2, will together cover up to $14 billion of loans to be acquired by Fannie Mae between May 2019 through April 2020, and transfer up to $455 million of credit risk on those covered loans. Fannie Mae has committed to acquire about $9.3 billion of insurance coverage on $359 billion of single-family loans through the CIRT program to date.

About Author: Seth Welborn

Seth Welborn is a Reporter for DS News and MReport. A graduate of Harding University, he has covered numerous topics across the real estate and default servicing industries. Additionally, he has written B2B marketing copy for Dallas-based companies such as AT&T. An East Texas Native, he also works part-time as a photographer.

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