Great job! My first question is: Why is the NAR and the FHFB benefitting from reporting only the LTV, and not the CLTV?
I spent an hour reading some very lengthy documents (while the kids are cooking dinner), and came up with this: The GSEs purchase the first lien in structured jumbo or piggyback loans!! Thus, by excluding the piggyback portion, they can keep lower capital requirements because they are not exposed to the total amount of the loan, just the first lien portion!! Clever, right? And the NAR would just report the first lien data, because it is also in their benefit to downplay the risks.
For further info, read on. The risk of GSEs comes from their new foray into investing. As of 2000, they had a $900 billion portfolio of mortgage loans and MBS, which exposes them to interest rate and credit risks, and operational risks. A significant percentage of their revenue comes from their investments. I bet that figure has multiplied in the 6 years since the report was written.
The “model” (I didn’t read enough to get whose model it is) allows Fannie Mae to purchase the 80% portion of an 80/10/10 loan, and no credit enhancement (i.e. PMI insurance) is requried by their charters under this structuring. This is also done for Jumbo loans. The model understates the credit risk and required capital for these structured loans. The problem is that one risky loans, by simple division, becomes two less risky loans on the books. GE’s Finance Division, which wrote this critique (obviously because the GSEs are a competitor they’d rather expose), pointed out that an 80/15 loan has the risk of a 95% LTV loan, and should be treated as a 95% LTV loan, and not an 80% LTV loan in the GSE risk profile.
The GSEs aggregate all loans > 95% LTV. However, risk increases in steps. The default risk for a 97% LTV and a 100% LTV loan ia 34% and 75% greater, respectively, than a 95% LTV loan!
The OFHEO does not consider CLTV, and underestimates the capital needed by the GSEs. For every $1 billion in an 80/10 or 80/15 combo loan, the capital should be increased by $48.9 million and $100.1 million, respectively! Just consider how much Fannie Mae can scrimp on their capital requirements by not counting the piggyback portion of their loans.
GSEs are allowed to purchase either the 1st or 2nd lien in a structured deal, so either the 80% or 20% portion of an 80/20, subjecting themselves to a 100% LTV default risk, which is, as you recall, 75% greater than the default risk on a 95% LTV.
GSEs encourage piggyback or structured loans, and it is a growing part of their business (again as of 2000). They make a Jumbo loan into a GSE-eligible mortgage.
The GSEs do classify and track liens by CLTV. But they don’t have to meet capital requirements by it, or report it.
So there you have it. Now we know why only LTV is reported. The government has not required the GSEs to update their risk profiling by CLTV.
I know why GSEs benefit from this, but why hasn’t the government required them to update their capital requirements for >80% CLTVs?
I wonder how many of you reading this are exposed to the risks at the GSEs. It’s even worse than I thought. They are holding and investing in loans based on the wrong risk profiles.
