Defining Characteristics

Exhibit 5-2 presents the main characteristics of the nonagency sectors. It covers such loan and borrower characteristics as lien status, loan size, FICO score, LTV ratio, occupancy (investor versus owner), documentation (full versus nonfull), loan purpose (purchase, cash-out refi, or rate refi), and AAA credit support. Note that the exhibit also indicates how the rating agencies have chosen to identify various parts of the nonagency market when they are included in a collateralized debt obligation (CDO). For example, in rating agency CDO terms, both the jumbo and alt-A sectors are part

U.S. Mortgage Market: Agency and Nonagency Issuance ($ billion)

1999

2000

2001

2002

2003

2004

Agency Pass Throughs (not in CMOs)

523

402

710

907

1,620

689

Agency CMOs

161

79

354

536

516

318

Total Agency

684

481

1,064

1,443

2,136

1,007

Resi A—Jumbo

75

54

142

172

237

233

Resi A—Alt-A

12

16

11

53

74

159

Resi B&C—Subprime Home Equity

56

52

87

123

195

362

Other*

5

13

27

66

80

110

Total Non-Agency

148

136

267

414

586

864

*Scatch and dent, seconds, resecuritizations.

Source: Inside MBS & ABS.

*Scatch and dent, seconds, resecuritizations.

Source: Inside MBS & ABS.

Loan and Borrower Characteristics, by Product Type

Agency*

Residential A

Residential B/C Sub-Prime

HEL

Jumbo A

Alt-A

HELOC

HELCIosed

Lien

1st

1st

1st

1st or 2nd

2nd

2nd

Loan Limit

<=Agency

>=Agency

none

none

none

none

Credit

Agency

A

A/A-

A-/C

A

A/A-

FICO:

Min

660

600

600

500

680

680

Avg

715

735

710

620

720

720

Avg CLTV

70%

70%

80%

83%

85%

75%

Occupancy

Owner

Owner

20% Investor

5% Investor

Owner

Owner

Documentation (Low/No Doc)

0%

35%

60%

35%

0%

0%

Avg Loan Size

180,000

430,000

235,000

165,000

40,000

30,000

Loan Purpose:

Purchase

45

45

27

0

0

Cash Out

15

35

66

85

85

Rate Refi

40

20

7

15

15

AAA Credit Support

Agency

2.50-3.00%

6.00-7.50%

18-22%

Agency limit = $359,650 as of January 1, 2005.

*FNMA and FHLMC.

Agency limit = $359,650 as of January 1, 2005.

of Resi A, and subprime home equities are Resi B&C. HELOCs and closed-end seconds are included in the CDO category Home Equity Loan.

In Exhibit 5-2, the nonagency sectors of the MBS market are defined by how they differ from agency collateral. The highlighted variables identify characteristics that most clearly define each sector. For example, jumbo loans have the same credit and documentation as agency loans but are larger than the conforming limit ($359,650 as of January 1, 2005). Alt-As have, for the most part, the same credit as agencies, may or may not be within conforming size limits, but have occupancy or documentation issues that land them outside the agency (and jumbo) underwriting guidelines. Subprime home equity loans have borrower credits falling below agency standards. HELOCs differ in that they are open-ended (i.e., revolving) lines of credit as opposed to closed-end, fully amortizing loans. And any type of second lien falls outside agency guidelines, which are limited to first liens.

These are the characteristics that define the major sectors of the nonagency market. However, as shown in Exhibit 5-2, there are other ways in which these loans differ from agency collateral. It is important to understand these differences in order to project prepayment speeds and credit performance. Also, with the advent of automated underwriting, the agencies and mortgage originators consider a large number of loan and borrower characteristics and no longer rely as much on the traditional risk measures of FICO, LTV ratio, and debt-to-payment (DTI) ratio. While these "other" characteristics are beyond the scope of this chapter, in considering any particular sector or issuer, they can be important.

In the following sections I discuss in greater detail some of the characteristics listed in Exhibit 5-2. I discuss them in the order they appear in the exhibit, not in the order of their importance.

Avoiding Credit Card Disaster

Avoiding Credit Card Disaster

People who struggle with saving money and getting out of debt will find these things in common: They don't know how to stop blaming. They have no idea where their money needs to go! They don't know they need to forget the home equity line. They also don't understand they need to sell some investments. Many more problems untold. Well don't worry, With the strategies that I’m about to let you in on , you will have no problems when it comes to understanding how to get out of credit card debt.

Get My Free Ebook


Responses

  • Zuzanna
    What is a"RESI" in ratng agency terms?
    6 years ago
  • Asmarina
    What characteristics of mortgagebacked securities?
    2 years ago

Post a comment