Two years ago, the FHFA announced a concerted effort to expand homeownership availability by their reducing constraints for insuring higher Debt-to-Income (DTI) loans. Historically, the definition of Qualified Mortgages (QM) that the FHFA insured were subject to a DTI cap of 43% with limited exceptions, but both agencies, Fannie Mae in particular, began to allow DTI ratios of up to 50%. Due to their increased usage of Credit Risk Transfer (CRT) transactions to limit their credit-risk exposure, CRT securitizations now have significantly higher exposure to loans with greater than 43% DTI, as seen in images 1 and 2 below.
This trend will undoubtedly be of importance for investors to be mindful of, especially as the market digests the material slowdown in home price appreciation over the past year. Using dv01's CRT Surveillance offering, investors can spot differing trends in performance, returns and cashflows, enabling them to easily understand their exposures going forward.
Through dv01's collateral attribute stratifying tool, we observe that Fannie Mae, through their CAS platform, has increased the percentage of loans above 42.5% DTI from 17.6% of origination in 2016 to 37% in 2018. Freddie Mac shows a more muted, but still substantial increase, rising from 23.8% to 31.8%. We can further see that, on average, these loans have lower FICO scores than the average origination for any given year (or vintage). For Fannie Mae's 2018 vintage, we can see that higher DTI loans have average FICO of 740 versus 749 for the overall vintage.
dv01's CRT Surveillance offering allows users to track various performance metrics between individual securitizations, compare multiple securitizations at once, or even aggregate the entire universe at once. The set of images below are a glimpse of the stratification options available to subscribers. Investors can chart performance by distribution date or loan age, and further drill down into performance trends though filters and groupings. We assess our findings on DTI below.
Image 3 - DQ rate 2015-2018
Image 4 - DQ rate 2012-2014
Image 5 - Ever 60+ 2015-2018
Image 6 - Ever 60+ 2012-2014
Image 7 - CPR 2015-2018
Image 8 - CPR 2012-2014
Image 9 - Cumulative Default Rates
Image 10 - DQ rate 2015 - 2018: 700-750 FICO, 70-80 LTV
Image 11 - DQ rate 2015 - 2018: 650-700 FICO, 70-80 LTV
In aggregate, loans with DTI (Debt-to-Income) above 43%, which we will refer to as ‘High DTI’ for the remainder of our analysis, have historically exhibited 1.7-2x higher rates of delinquency at the same loan age versus those below 43% (Low DTI). Additionally, High DTI loans have shown a historically higher probability of ever becoming seriously delinquent by a factor of 1.9-2x, as seen in image 4 above. Prepayment (CPR) rates have been similar between High DTI and Low DTI loans. As we can see in image 6 above, actual cumulative default rates to date are very low, so default and loss comparisons would not be meaningful.
As we noted in the collateral attribute stratification section earlier, higher DTI loans tend to have lower FICO scores than lower DTI loans. In order to better isolate the impact of DTI, dv01 allows users to filter by multiple loan attributes. For our analysis, we compared delinquency rates by vintage for loans between 700 and 750 FICO, and 70 to 80 LTV, which are shown in image 7. For this cohort, the ratio in delinquency rate per loan age noted above between High DTI and Low DTI loans fell to 1.5x. When we applied a different cohort, 650 to 700 FICO and 70 to 80 LTV (image 8), the ratio fell further to 1.2x.
In response to the higher risk taken in CRT deals, both Fannie Mae and Freddie Mac have substantially increased their credit enhancements since the end of 2017. Fannie Mae has increased enhancement levels on the lowest-rated tranches have increased from 1% to 1.25% and on the lowest-rated investment-grade tranches from 3.1% to 3.85% (seen in Image 9 below).
Using dv01's cashflow engine, users can customize scenarios to run additional stress tests specific to higher DTI loans. The same attributes used to stratify performance can be used in cash flow segmentation as well. See Image 10 below.
To learn more about dv01's CRT Surveillance offering, request a demo, or to view any of our other product offerings, please contact us at email@example.com.
Vadim Verkhoglyad, CFA, Senior Product Specialist