As noted in an earlier post we discussed how the GSE’s have been sharing credit risk with private investors through the Credit Risk Transfer (CRT) market. At that time, we discussed how losses tended to grow over time, and noted the significant geographical variation in default rates by state, reflecting local economic conditions. Another consideration noted along these lines is underwriting characteristics. This impact is particularly notable when comparing the performance of loans for lower-credit quality borrowers to others. The chart below looks at the relative performance in CRT high-LTV reference pools between those with FICO scores less and equal to 680 and those greater than that score:
The Covid-19 Virus has clearly had a devastating impact on the jobs market in the US. Over the past four weeks, over 22 million people have filed for unemployment claims. This number has grabbed the headlines, but to get a more accurate sense of perspective on the problem it is best to look not at new claims, but instead at the stock of people who are receiving benefits, and then scale this by the size of the labor force. This concept is referred to as the “insured unemployment rate”, which was first reported in 1971. This figure reached an all-time high of 8.2% in the week ending April 4, greater than the peak during the global financial crisis of about 5% and the all-time peak near 7% in the mid-1970’s.
The Credit Risk Transfer (CRT) market was launched in 2013 by the GSE’s to help protect taxpayers from credit risk (risk of borrower nonpayment) by sharing mortgage losses with private investors. The market has grown substantially since that time, with the outstanding balance of reference loans reaching over $2 trillion at the end of 2019. Over this time, investors have largely been rewarded, as home prices have continued to rise and labor market conditions have been robust. Chart 1 shows these for the sixteen most recent high loan-to-value (LTV) Fannie Mae deals from their CRT program Connecticut Avenue Securities (CAS).
1. Cumulative Default Rate for CAS Securities
As US society goes deeper into “Shelter in Place” and “Social Distancing” to protect itself from the COVID-19 virus, jobs are being lost at a rapid pace. Jobless claims in the United States for the week ending March 21 came in at a record high 3.28 million. In turn, household finances are being stretched around the country. Fiscal stimulus and various debt forbearance plans can help to mitigate the damage, but families will have to make decisions about how to allocate scarce resources based on their own priorities.
【Debtwire】S&P/Case-Shiller Home Price Indices futures have been a lonely corner of activity for the CME Group over the past decade, perhaps as home values have been reliable gainers amid falling unemployment, growth in the number of households, and a dearth of available homes. Now, the abrupt shift in the US economic outlook might draw attention to the derivatives, according to one market maker.