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Data on the Risk Characteristics and Performance of Single-Family Mortgages Originated from 2001 through 2008 and

Financed in the Secondary Market

September 13, 2010

Overview

There has been considerable public discussion of the roles Fannie Mae andFreddie Mac (the Enterprises) may have played in the financial crisis thatbegan in the third quarter of 2007.1 This Federal Housing Finance Agency(FHFA) data release contributes to that discussion by summarizing informationon the risk characteristics and performance of two sets of single-familymortgage loans originated from 2001 through 2008 and financed in thesecondary mortgage market: those acquired by the Enterprises and thosefinanced through the issuance of private-label mortgage-backed and asset-backed securities (collectively called private-label MBS). The period 2001through 2008 encompasses the development and peak of the recent single-family mortgage lending and house price boom and the beginning of theensuing bust. The release focuses on conventional loansthose withoutgovernment insurance or a government guarantee.

Purpose

The data in the release provide broad answers to the questions:

How do the volume, risk characteristics, and subsequentperformance of single-family mortgages acquired by theEnterprises compare to those financed with private-label MBSduring that period? and

How did the distribution of risk characteristics such as loan-to-value (LTV) ratios and credit scores and the mix between fixed-and adjustable-rate loans change over time for Enterprise-acquired and loans financed with private-label MBS?

Key Findings

The data reveal important differences in the characteristics and performanceof the conventional single-family mortgages originated from 2001 through

1 For example, the testimony before the Financial Crisis Inquiry Commission onFebruary 27, 2010, ofDwight M. Jaffee, The Role of the GSEs and Housing Policy inthe Financial Crisis, and Christopher Mayer, Housing, Subprime Mortgages, andSecuritization: How did we go wrong and what can we learn so this doesnt happenagain?
http://www.fcic.gov/hearings/pdfs/2010-0227-Jaffee.pdfhttp://www.fcic.gov/hearings/pdfs/2010-0227-Jaffee.pdfhttp://www.fcic.gov/hearings/pdfs/2010-0227-Mayer.pdfhttp://www.fcic.gov/hearings/pdfs/2010-0227-Mayer.pdfhttp://www.fcic.gov/hearings/pdfs/2010-0227-Mayer.pdfhttp://www.fcic.gov/hearings/pdfs/2010-0227-Mayer.pdfhttp://www.fcic.gov/hearings/pdfs/2010-0227-Mayer.pdfhttp://www.fcic.gov/hearings/pdfs/2010-0227-Mayer.pdfhttp://www.fcic.gov/hearings/pdfs/2010-0227-Mayer.pdfhttp://www.fcic.gov/hearings/pdfs/2010-0227-Jaffee.pdfhttp://www.fcic.gov/hearings/pdfs/2010-0227-Jaffee.pdf

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2008 that were acquired by the Enterprises and financed with private-labelMBS, as well as other significant information.

Credit Scores

A major innovation in single-family mortgage lending has been the reliance onstatistical models of borrower behavior. Credit scores are a fundamental partof that innovation and have facilitated the rapid movement of mortgagelenders to automated underwriting. Lower credit scores are associated withgreater mortgage credit risk. Borrower credit scores used here werecalculated using models developed by Fair Isaac Corporation (FICO).

Enterprise-acquired mortgages were predominantly made toborrowers with FICO scores above 660. Such loans comprised 84percent of all Enterprise-acquired mortgages originated between2001 and 2008 and ranged from 82 percent of 2001 originationsto 91 percent of 2008 originations. Eleven percent of all

Enterprise-acquired loans during the period were made toborrowers with FICO scores between 620 and 660. Only 5percent of Enterprise-acquired loans were made to borrowerswith FICO scores below 620.

Mortgages financed with private-label MBS originated between2001 and 2008 were much more likely to be made to borrowerswith lower FICO scores. Borrowers with FICO scores above 660received 47 percent of mortgages financed with private-labelMBS, while borrowers with FICO scores below 620 received closeto 32 percent of those mortgages, and borrowers with FICO

scores between 620 and 660 received just over 21 percent.

Loan-to-Value Ratios

Loan-to-value ratios measure the relative use of borrower equity andmortgage debt to finance the purchase of a home. Loans with higher LTVratios rely more heavily on borrowed funds and pose more credit risk. Secondliens (including closed-end second mortgages and home equity lines of credit)further increase credit risk by reducing borrower equity in the property, butsecond liens, even if incurred simultaneously with the first mortgage, are notcaptured in the datasets used to prepare this release.

The vast majority of Enterprise-acquired loans had LTV ratios atorigination of 80 percent or less. Such loans comprised 82percent of all Enterprise-acquired mortgages originated between2001 and 2008 and ranged from 75 percent of 2007 originationsto 86 percent of 2003 and 2005 originations. Loans with LTVratios above 80 percent but no greater than 90 percent and loanswith LTV ratios above 90 percent each constituted 9 percent ofEnterprise-acquired loans during the period, with loans in the

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entered real estate owned (REO) status through December 2009. We call suchloans ever 90-days delinquent.

Roughly 5 percent of Enterprise-acquired fixed-rate mortgages(FRMs) and 10 percent of Enterprise-acquired adjustable-rate

mortgages (ARMs) were ever 90-days delinquent at some pointbefore the end of 2009.

In contrast, roughly 20 percent of FRMs financed with private-label MBS and 30 percent of ARMs financed with private-labelMBS were ever 90-days delinquent at some point before year-end 2009. The relatively worse performance of private-labelMBS-financed mortgages was consistent across origination yearsand, within each year, across nearly all groups of loans withsimilar LTV ratios and FICO scores.

Although higher FICO scores and lower LTV ratios are correlatedwith lower 90-day delinquency rates within an origination-year,that correlation varies significantly across origination years.Delinquency rates of all mortgages deteriorate over time fromthe 2003 through the 2007 origination years. That deteriorationis worse for ARMs and for loans that combine low FICO scoresand high LTV ratios.

Data and Methodology

The data used to prepare the release include conventional fixed- andadjustable-rate mortgages secured by first liens on owner-occupied andinvestor-owned one-to-four-family properties originated between 2001 and2008. The data are filtered to include only mortgages that had initial balancesat or below the conforming limit for one-unit properties in effect during theyear and in the area in which the mortgage was originated. The data comefrom two distinct datasets.

The Historical Loan Performance dataset, which is maintained byFHFA, contains loan-level information on the characteristics andperformance of all single-family mortgages acquired by theEnterprises. Enterprise-acquired mortgages include thosepurchased for cash and those financed with Enterprise-guaranteed mortgage-backed securities but not those backingprivate-label MBS bought by the Enterprises. The mortgages inthe Historical Loan Performance dataset used to prepare therelease had an aggregate unpaid principal balance at originationof $8.6 trillion.

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The LoanPerformance securities dataset contains loan-levelinformation on the characteristics and performance of single-family mortgages financed with private-label MBS. FHFA leasesthis dataset from CoreLogic, Inc. This dataset includes loansbacking private-label MBS bought by the Enterprises. The

mortgages in the LoanPerformance dataset used to prepare therelease had an aggregate unpaid principal balance at originationof $1.8 trillion before weighting and $2 trillion after weighting.(Appendix A provides a detailed discussion of the datasets andweighting.)

The release compares the unpaid principal balance at origination, loan counts,and performance through year-end 2009 of groups of single-family mortgagesoriginated in each year. The groups were formed on the basis of loan paymenttype (fixed or adjustable rate), borrower credit score at origination, and LTVratio at origination. Both datasets include borrower credit scores calculatedusing models developed by Fair Isaac Corporation (FICO). Those dimensions

were chosen to facilitate comparisons across the Enterprise and private-labelMBS funding channels while taking into account factors associated with creditrisk. The datasets lack some information necessary to assess mortgage creditrisk, including the level of documentation and other underwriting practicesthat distinguish Alternative-A (Alt-A) loans and the presence of second lienson properties, whether at origination of the first mortgage or subsequently.

See Appendix A for more information on the data.

Discussion of the Data

This section provides more detail about the differences among loans acquiredby the Enterprises or financed through the issuance of private-label MBS,including more information on the dollar volumes of loans, risk characteristics,subsequent performance, and some evidence of the consequences for thatperformance of layering the risks associated with low FICO scores and highLTV ratios. Tables 1 through 3 (see pages 19 through 27) provide additionaldetail. Appendix B includes tables with greater detail in terms of FICO scoresand LTV ratios.

In the figures and tables, shades of blue indicate Enterprise-acquiredmortgages and shades of red indicate loans financed with private-label MBS.Darker shades generally indicate less risky mortgages (that is, those withfixed rates, lower LTV ratios, or higher FICO scores), whereas lighter shadesindicate riskier loans (that is, those with adjustable rates, higher LTV ratios,or lower FICO scores). In tables 1 through 3, the darkest shades of red andblue indicate statistics for combined ARMs and FRMs.

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Payment Types and Dollar Volumes

Figure 1 shows how the distribution of single-family mortgages originatedfrom 2001 through 2008 varied across the two secondary market funding

channels and the two payment types.2

The combined datasets encompass $10.6 trillion in single-familymortgages originated from 2001 through 2008. Of that total, 82percent ($8.6 trillion) was acquired by the Enterprises and 18percent ($2 trillion) was financed with private-label MBS. Thus,the Enterprises acquired more than four times the dollar volumeof loans that were financed with private-label MBS.

With respect to payment type, 78 percent of the loans in the twodatasets were FRMs and 22 percent were ARMs.

Figure 1: Single-Family Mortgages Originated from 2001 through2008 and Sold into the Secondary Market, by Funding Channel,Payment Type, and Origination Year ($ in Billions)

Source: FHFA (using data from Fannie Mae, Freddie Mac, and CoreLogic, Inc.)

2Figure 1 and the subsequent figures exclude loans with missing FICO scores or LTV

ratios.

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Enterprise-acquired mortgages were predominantly FRMs, whereasloans financed with private-label MBS were predominantly ARMs.

The volumes of both FRMs and ARMs financed with private-labelMBS grew rapidly from 2001 through 2005 and then declined to

almost nothing by 2008.

FICO Scores and Loan-to-Value Ratios

Figures 2 and 3 show the distribution of mortgages in the two datasets byborrower FICO scores and LTV ratios for each origination year. In Figure 2,loans labeled high FICO have FICO scores of 660 or higher; loans labeled

medium FICO have FICO scores below 660 but no less than 620; and loanslabeled low FICO have FICO scores below 620. In Figure 3, loans labeled

low LTV have original LTV ratios no greater than 80 percent; loans labeledmedium LTV have original LTV ratios above 80 percent but no greater than90 percent; and loans labeled high LTV have original LTV ratios above 90percent.

In every origination year, loans with FICO scores above 660make up at least 70 percent of all mortgages in the combineddatasets. However, in years 2004 through 2006, such loansaccount for 70 percent to 72 percent of the data, whereas inother years they account for 78 percent to 92 percent.

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Figure 2: Single-Family Mortgages Originated from 2001 through2008 and Sold into the Secondary Market, by Funding Channel, FICOScore Category, and Origination Year ($ in Billions)


In every origination year, mortgages with LTV ratios of 80percent or less make up at least 75 percent of all loans, the levelreached in 2007.

3During the height of the lending boom from

2003 through 2006, the share of loans with reported LTV ratiosat origination of 80 percent or less stayed between 78 percentand 83 percent.

From 2004 through 2007, loans financed with private-label MBSaccounted for unusually large shares of loans with high FICO

scores or low LTV ratios. From 2004 through 2006, theEnterprises shares of loans with higher-risk characteristics alsofell relative to total loans.

3 Federal regulatory guidance on nontraditional mortgage product risks issued inSeptember 2006 discouraged the use of simultaneous second liens, the presence ofwhich led to understatement of the total or combined LTV ratio of all liens on theproperty. See Interagency Guidance on Nontraditional Mortgage Product Risks,available at http://www.occ.treas.gov/ftp/release/2006-107a(Guidance).pdf.
http://www.occ.treas.gov/ftp/release/2006-107a(Guidance).pdfhttp://www.occ.treas.gov/ftp/release/2006-107a(Guidance).pdfhttp://www.occ.treas.gov/ftp/release/2006-107a(Guidance).pdf

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Figure 3: Single-Family Mortgages Originated from 2001 through2008 and Sold into the Secondary Market, by Funding Channel, LTVRatio Category, and Origination Year ($ in Billions)


Tables 1 and 2 on pages 19 through 24 show more detail about thedistribution by origination year of Enterprise-acquired and mortgages financedwith private-label MBS by payment type, FICO score, and LTV ratio atorigination. Those tables reveal major differences in the credit risk profile ofthe loans financed through those two funding channels.

About 5 percent of all Enterprise-acquired loans had FICO scoresof less than 620 at origination. Another 11 percent had FICO

scores above 620 but no greater than 660. Only about one-tenthof those loans were ARMs.

About 32 percent of all loans financed with private-label MBS hadFICO scores below 620. Another 21 percent had FICO scores nogreater than 660. About three-quarters of those loans carriedadjustable interest rates.

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About 9 percent of all Enterprise-acquired loans and about 11percent of all loans financed with private-label MBS had LTVratios above 90 percent. Less than one-tenth of the Enterprise-acquired loans with LTV ratios in that category carried adjustableinterest rates, whereas just over two-thirds of the loans financed

with private-label MBS with LTV ratios above 90 percent carriedadjustable-rates.

Performance

Figure 4 shows, by origination-year cohort, the Enterprises shares of allsingle-family mortgages in the combined datasets and of those loans thathave been ever 90-days delinquent. That figure yields some broadgeneralizations about the relative performance of Enterprise-acquired andmortgages financed with private-label MBS.

The Enterprises share of total loans fell from above 90 percent in2001 and 2002 to just above 60 percent in 2005 before climbingback to nearly 100 percent in 2008.

For all origination years, the Enterprises share of ever 90-daysdelinquent mortgages is lower than the Enterprises share of allloans in the combined datasets. That indicates that the post-origination performance of Enterprise-acquired loans was, onaverage, superior to the post-origination performance of private-label MBS-financed loans. That result is not surprising, sinceEnterprise-acquired loans had generally better risk characteristicsas measured by payment type, FICO score, and LTV ratio at

origination.

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Figure 4: Enterprise Shares of Single-Family Mortgages Originatedfrom 2001 through 2008 and Sold into the Secondary Market and Ever90-Day Delinquencies of Those Mortgages by Origination Year


Table 3 on pages 25 though 27 gives more detail on the relative performanceof Enterprise-acquired and loans financed with private-label MBS, comparinggroups of mortgages based on payment type, FICO score, and LTV ratio atorigination. The data in Table 3 reveal that, even holding those characteristicsconstant, Enterprise-acquired loans have lower ever 90-day delinquency ratesthan mortgages financed with private-label MBS for almost all combinations ofcharacteristics and origination years.

For all loans taken together, ever 90-day delinquency rates werefour to five times greater for mortgages financed with private-label MBS (27 percent) than for Enterprise-acquired loans (6percent).

When holding payment type constant, differences in thosedelinquency rates are smaller.

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o For FRMs, ever 90-day delinquency rates wereabout four times greater for loans financed withprivate-label MBS (20 percent) than for Enterprise-acquired mortgages (5 percent).

o

For ARMs, ever 90-day delinquency rates wereabout three times greater for mortgages financedwith private-label MBS (30 percent) than forEnterprise-acquired loans (10 percent).

The greater difference between the delinquency experience of allmortgages financed with private-label MBS versus all Enterprise-acquired mortgages arises from the greater concentration of theloans financed with private-label MBS in much poorer performingARMs and the greater concentration of Enterprise-acquired loansin much better performing FRMs.

At the level of detail shown in Table 3, there are only a fewcombinations of characteristics where Enterprise-acquiredmortgages had higher ever 90-day delinquency rates than loansfinanced with private-label MBS. All but one of thosecombinations are in 2008, after the private-label MBS markethad largely shut down and private-label MBS-financed loanoriginations were very limited. The exceptional instance is ARMsoriginated in 2007 with FICO scores below 620 and LTV ratiosabove 90 percent.

FICO Score and LTV Ratio Risk Layering and Performance

Figures 5 and 6 on pages 13 and 14 show the dollar volume of single-familymortgages in each dataset that fall into the two most extreme FICO score/LTVratio groups presented by origination year in tables 1 through 3. Figure 5shows the dollar volumes of loans with characteristics that suggest they posethe least credit riskthose with FICO scores at or above 660 and LTV ratios ator below 80 percent. Figure 6 shows the dollar volumes of loans withcharacteristics that suggest they pose the greatest credit riskFICO scoresbelow 620 and LTV ratios above 90 percent. Note that the scale of Figure 5 is64 times that of Figure 6 because of the dominance of lower-risk FRMsacquired by the Enterprises among all mortgages in the combined datasets.(Tables 1 and 2 on pages 19 through 24 give more detail by origination yearabout the distribution of Enterprise-acquired and private-label MBS-financedloans by payment type, FICO score, and LTV ratio.)

Mortgage origination volumes, payment types, FICO scores, LTVratios, and performance differ systematically across the twodatasets.

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Enterprise acquisitions were dominated by loans to borrowerswith FICO scores above 660 and LTV ratios at or below 80percent. The share of such mortgages averaged 71 percent ofEnterprise volume for the whole period and dipped as low as 64percent in 2007 and 66 percent in 2001.

Figure 5: Lower Risk Single-Family Mortgages Originated from 2001through 2008 and Sold into the Secondary Market, by OriginationYear: FICO Score > 660, LTV Ratio 80 Percent ($ in Billions andPercent of Annual Originations by Secondary Market Funding Channel)

66%

71%75%

71%74%

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ntofAnnualOriginationsbyFundingChannel

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Enterprise Loans PLS Loans Enterprise Loans (%) PLS Loans (%)


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Figure 6: Higher Risk Single-Family Mortgages Originated from 2001through 2008 and Sold into the Secondary Market, by OriginationYear: FICO Score < 620, LTV Ratio > 90 Percent ($ in Billions andPercent of Annual Originations by Secondary Market Funding Channel)

1.0%

0.9%0.7%

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Loans to borrowers with FICO scores above 660 and LTV ratios ator below 80 percent accounted for a much lower share of totalprivate-label MBS volume. Such mortgages averaged 37 percent

of private-label MBS volume for loans originated between 2001and 2008 and increased over the period from 15 percent in 2001to 79 percent (of much lower overall volume) in 2008.

Mortgages with both FICO scores below 620 and LTV ratios above90 percent averaged 1 percent of total Enterprise-acquired loans,peaking at 2 percent in 2007.

Mortgages with both FICO scores below 620 and LTV ratios above90 percent constituted an average of 3 percent of all loansfinanced with private-label MBS. Such loans peaked as a share ofvolume at almost 4 percent in 2003.

Figures 7 and 8 show the relative performance of the two groups of loans withcombinations of FICO scores and LTV ratios that suggest they pose the lowestand highest levels of credit risk. As in Figure 4, Enterprise-acquired mortgagesoriginated in each year perform better than mortgages financed with private-label MBS.

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Figure 7: Ever 90-Day Delinquency Rates on Lower Risk Single-Family Mortgages Originated from 2001 through 2008 and Soldinto the Secondary Market, by Origination Year: FICO Score >660, LTV Ratio 80 Percent

0%

10%

20%

30%

40%

50%

60%

2001 2002 2003 2004 2005 2006 2007 2008

Enterprise Loans PLS Loans


Ever 90-day delinquency rates for Enterprise-acquired loans inthose FICO score/LTV ratio groups increase over time, reachingpeak levels for loans originated in 2006 for the lowest-risk group(see Figure 7) and for loans originated in 2007 for the highest-risk group (see Figure 8).

The increase in delinquency rates for Enterprise-acquired loans isgreater for the highest-risk group (rising from 18 percent for2001 originations to 49 percent for 2007 originations) than forthe lowest-risk group (rising from just under 1 percent for 2001originations to just under 10 percent for 2006 originations).

Ever 90-day delinquency rates for loans financed with private-label MBS in those FICO score/LTV ratio groups declined inorigination years 2002 and 2003 as the economy emerged fromthe 2001 recession. Delinquency rates then increased over time,peaking with 2006 originations for the lowest-risk FICO

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score/LTV ratio group and with 2006 and 2007 originations forthe highest-risk group.

The increase in delinquency rates for loans financed with private-label MBS is proportionately greater for the lowest-risk FICO

score/LTV ratio group (rising from just over 4 percent for 2003originations to just over 38 percent for 2006 originations) thanfor the highest-risk group (rising from just under 26 percent for2003 originations to just over 58 percent for 2007 originations).

Figure 8: Ever 90-Day Delinquency Rates on Higher Risk Single-FamilyMortgages Originated from 2001 through 2008 and Sold into theSecondary Market, by Origination Year: FICO Score < 620, LTV Ratio >90 Percent

0%

10%

20%

30%

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2001 2002 2003 2004 2005 2006 2007 2008

Enterprise Loans PLS Loans


Table 3 on pages 25 through 27 gives more detailed information about theperformance of mortgages in each FICO score/LTV ratio group. Ever 90-daydelinquency rates vary considerably by year of origination, payment type, andrisk characteristics at origination.

Ever-90-day delinquency rates of all groups of loans increasedfrom 2003 through 2007. The increase was greater for ARMs

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than for FRMs. The layering of the risks posed by lower FICOscores and higher LTV ratios matters as well.

Roughly 5 percent of Enterprise-acquired FRMs and 10 percent ofEnterprise-acquired ARMs became ever 90-days delinquent at

some point before December 31, 2009. For origination years2001 through 2005, ARMs performed comparably to FRMs, butthe performance of ARMs relative to FRMs deteriorated after2004.

In contrast, roughly 22 percent of FRMs financed with private-label MBS FRMs and 32 percent of ARMs financed with private-label MBS became ever 90-days delinquent at some point beforeDecember 31, 2009. ARMs financed with private-label MBS hadhigher ever 90-day delinquency rates than private-label MBS-financed FRMs in each origination year.

Topics for Future Research

This release represents FHFAs initial effort to compare the single-familymortgages acquired by the Enterprises and financed with private-label MBS inthe last decade. In addition to the information on payment types, LTV ratioson first liens, borrowers FICO scores, and performance exploited to constructthis data release, the Historical Loan Performance and LoanPerformancedatabases contain information on the ZIP codes in which properties arelocated and the contract terms of loans. That information can be used to

analyze the market shares of Enterprise-acquired and private-label MBS-financed mortgages in different states and localities and the prevalence in thetwo channels of nontraditional products such as interest-only loans, negativelyamortizing mortgages, and ARMs with steep teaser rates. Exploration of thosedata would shed further light on the roles the Enterprises may have played inthe mortgage lending boom of the last decade.

In addition, the Historical Loan Performance and LoanPerformance datasetslack uniform information on the level of documentation and other underwritingpractices that distinguish Alt-A loans and on the presence of second liens onproperties, whether at origination of the first lien or subsequently. Suchinformation would be necessary to assess the contribution of Alt-A lending orsecond liens to the differences in mortgage performance documented in thisrelease.

The data presented in this release or contained in the Historical LoanPerformance and LoanPerformance datasets are inadequate to drawconclusions with respect to complex, causal relationships between Enterpriseor private-label financing of single-family mortgages and contemporaneous orlater developments in housing and financial markets or the broader economy.

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Understanding those relationships would require extensive and carefulanalysis of the data presented here in conjunction with other data.

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Vintage

Funding

Channel

FICO

Documents

Risk Chars 9132010