Agency RMBS Credit-Linked Notes: SSFA Capital Treatment–Nom de Plumber’s Thought of the Day

ndp  Nom de Plumber is a Nom de Plume.

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(NDP notes unintended consequences with the new Freddie STACR synthetic first loss securities which reference new Freddie RMBS pools.)

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New Fannie Mae and Freddie Mac credit-linked notes would be subject to regulatory capital treatment, but the new SSFA methodology which regulators have mandated for this capital calculation would have a problem:  the GSE’s may not provide critical data now, and any future data might be skewed because of policy-driven housing market distortions.

http://www.bloomberg.com/news/2013-06-25/freddie-mac-said-to-plan-start-of-mortgage-risk-sharing-deals.html

These new credit-linked notes will reference mortgage pools which they either own or guarantee.  For regulatory capital, these notes would not be treated as sovereign credit risk, like typical Agency RMBS (where an Agency transforms borrower delinquencies, modifications, and defaults into loan prepayments for investors).

The Simplified Supervisory Formula Approach (SSFA) runs off loan-level data as inputs.  After delinquent Agency mortgage loans have been bought out of a pool, will their ongoing credit performance and ultimate resolutions be robustly reported?   Credit-linked note investors need to track:

  • · curing or recidivism
  • · forbearance or modification
  • · refinancing
  • · property short sale or foreclosure liquidation
  • · originator putback or borrower rescission.

Delinquency buyouts, HAMP modifications, borrower-friendly servicing (forbearance, forgiveness, Homeowner Bill or Rights), and HARP refinancings might mask the true default propensity of underlying mortgage loans, understating the credit risk and regulatory capital of these new instruments.  

  • To measure ‘W’, the SSFA delinquency metric, how might one view loans which have been modified or even re-modified under HAMP to assist at-risk borrowers, but which might not be flagged as delinquent per the Basel SSFA definition?  Amid the new no-doc GSE  modifications initiative, this might be quite prevalent.  

http://www.bis.org/publ/bcbs236.pdf

“….The variable ‘W’ would equal the ratio of the sum of any underlying exposures within the securitised pool that were “delinquent” to the ending balance. “Delinquent exposures” would be defined to mean exposures that were 90 days or more past due, subject to a bankruptcy or insolvency proceeding, in the process of foreclosure, held as real estate owned, had contractually deferred interest payments for 90 days or more, or were in default.…”

Regulatory clarification may be necessary for these Agency RMBS credit-linked notes to succeed…….. vital to GSE conservatorship, US taxpayer loss protection, the resurrection of private mortgage lending, and the right-sizing of GSE/FHA guarantee fees.      

Thank you.

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