Recent securitized residential mortgage loans initiated by brokers and correspondent lenders are showing notable improvements and getting closer to performing like the retail loans originators source directly from the borrower, according to Moody’s Investors Service.
Analysts attribute the narrowing performance gap to tighter lending and regulatory controls over brokers and correspondents.
Performance improvements have resulted in credit positive results for newer residential mortgage-backed securities.
The gap, however, may widen up again.
“Economic stress could expose weaknesses in third-party loans that are not yet apparent,” warns Kathy Kelbaugh, Moody’s VP, author of the report titled, “Tighter Originator Controls on Recent Third-Party Residential Mortgage Originations Decrease Risk in US RMBS.”
The risks to RMBS will vary depending on whether the party that initiates the loans is a broker or a correspondent, “and on how much oversight originators and aggregators exercise” over them, she explained.
Conclusions are based on the cumulative default rates on Fannie Mae’s and Freddie Mac’s third-party and retail-originated loans from 2000 to 2012.
Moody’s finds that recently-originated third-party loans have performed as well as, and even slightly better than, retail originations, while loans originated between 2004 and 2008 have defaulted far more frequently than retail originations.
Kelbaugh lists among the positive factors originators efforts to change processes, better screen defective credit and appraisal underwriting and fraud, including “refusing to purchase loans that a correspondent sourced from yet another third party.”
Tighter controls over broker-sourced loans using third-party fraud-detection technology also helped.
