Given the strong credit performance of prime conventional loans, defaults generally are ignored as a component of prepayments in conventional pools. For example, in 2004, Freddie Mac reported serious delinquencies (delinquent 90 days or more or in foreclosure) of 0.73% to 0.87% on loans in portfolios and securities, whereas Fannie Mae reported 0.57% to 0.64%. Government loans, on the other hand, experience serious delinquencies at two to three times higher rates. For example, in its National Delinquency Survey, for the second quarter of 2004, the MBAA reported a serious delinquency rate of 2.84% for FHA and 1.66% for VA loans. In addition, Ginnie Mae permits servicers to buy delinquent FHA and VA loans out of pools (at par) under certain circumstances. These loans can be rese-curitized (usually as private CMOs or Fannie Mae or Freddie Mac guaranteed securities) if the loans become current again, or "reperform." As a result, servicers have an incentive to buy out eligible loans having premium coupons in hopes of reselling them at a gain over par. This activity has had a discernible impact on prepayments in premium coupon Ginnies, generating spikes on a periodic basis.18 To summarize, refinancing is responsible for most of the variability and uncertainty regarding pass-through cash flows. Turnover, by comparison, is a relatively stable (albeit seasonal) contributor to prepayments. It can be swamped in

18. Following natural disasters such as hurricanes, floods, or earthquakes, the President may grant servicers the right to buy out delinquent loans in the disaster area. Because these buyouts are confined to limited geographic areas for limited periods, they may affect pools with geographic concentrations in those areas, but they generally have minimal impact on aggregate prepayment behavior.

rallies but becomes the focus of prepayment concerns in rising- or high-interest-rate environments. The impacts of curtailment and default generally are dismissed in efforts to anticipate or model prepayments in agency securities.

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