Fitch Ratings: Post-Crisis Enhancements Paying Dividends for GSEs

Fitch Ratings, New York, said numerous operational improvements made in recent years have led to lower operational risk for both Fannie Mae and Freddie Mac.

The Fitch Government-Sponsored Enterprise Operational Risk report said Fannie Mae and Freddie Mac have “creatively taken advantage of their scale,” access to big data and market leverage to improve loan manufacturing quality and ensure seller/servicer compliance with their policies and procedures. As a result, the GSEs have reduced operational risk and increased certainty of mortgage loan performance.

“The financial crisis revealed operational weaknesses at most mortgage lending institutions, and led to substantial credit losses related to manufacturing defects and misrepresentation,” the report said. “Since the crisis, the GSEs have taken a number of significant steps to improve loan quality. The improvements include establishing streamlined datasets for delivery of loan and collateral data, establishing processes to independently validate certain underwriting loan components, and leveraging growing proprietary appraisal databases and tools to identify appraisal risk prior to loan acquisition.”

The report noted while there are specific areas where one entity has an advantage over the other in operational risk controls, Fitch rates both GSEs as “Above Average” in their operational risk controls. Fitch reduces projected mortgage losses on loans acquired by either Fannie Mae or Freddie Mac relative to other aggregators of loans, and currently applies the same credit to both GSEs.

“The post-crisis enhancements have contributed to the strong credit performance of the loans and a significant reduction in manufacturing defects as measured by quality control results and loan repurchases by sellers,” Fitch said.