Fitch: U.S. RMBS Risk Diverging on Recent Investor Loans

A rise in non-traditional or no income borrower documentation has led to significant variation in the credit risk of recently originated investor property loans in U.S. residential mortgage-backed securities deals, said Fitch Ratings, New York.

Fitch reported loans that do not meet traditional residential or commercial underwriting standards have significantly higher credit risk than those that meet agency conforming documentation standards.

Fitch Managing Director Grant Bailey noted there is extensive historical data available on agency conforming investor property loans. Fannie Mae and Freddie Mac provide loan level historical data on three million investor loans with traditional documentation, allowing for a deep analysis of default and loss behavior through various economic environments. Conversely, he said, there is relatively limited data available on investor loans that do not meet traditional residential or commercial underwriting standards.

“We currently assume stated-income investor property loans originated prior to the financial crisis are the best indication of how investor property loans with non-traditional income documentation may behave in a severe economic stress,” Bailey said. “Non-traditional investor loans often do not consider the borrower’s personal debt-to-income ratio.”

To assess whether personal DTI influences behavior on such investor loans, Fitch analyzed a historical sample of roughly 50,000 agency conforming loans originated prior to 2009 that had strong positive property debt service coverage ratios. The monthly rents were not provided by the borrower but were retroactively estimated by the third-party information provider RentRange. The default behavior of the sample suggested borrowers with high personal DTIs were significantly more likely to default than borrowers with low personal DTIs, even when the property had a strong positive cash-flow ratio. Agency conforming investor loan guidelines appropriately consider this risk.”

“We assume borrowers that own relatively few investor properties and choose higher interest rate non-traditional loan products that do not consider personal DTI are likely to have a high personal DTI,” Bailey said.