Mortgage banks are supplying Wall Street with better loans to securitize than they did just a few years ago, an analyst at a leading investment bank has found.
Overall, loans securitized in 1992 and 1993 defaulted much less often than those issued in 1990 and 1991, said Peter DiMartino, a mortgage analyst at Salomon Brothers Inc. Mr. DiMartino drew his conclusions after examining nonagency loans issued by six major mortgage banks. The loans were defined as nonagency because they exceeded the maximum set by Fannie Mae and Freddie Mac for securitizations or because they were made to borrowers with tarnished credit records.
Loans made during the refinancing boom from 1992 to 1994 are holding up better than those from the two previous years because they were made with lower loan-to-value ratios, Mr. DiMartino said. "Cushioned by greater equity in their homes, fewer borrowers defaulted."
The news about loan performance came as Wall Street is coming out of a relatively dry spell for mortgage securities. During the first half of this year, agencies issued $201.6 billion of mortgage-backed securities, compared with $269.2 billion for all of 1995, when losses on esoteric types of mortgage securities caused investors to flee.
Mortgage securities issued this year are expected to perform well, relative to 1991 and 1992 activity. Mr. DiMartino attributed this to better credit standing, stronger underwriting, and improved economic conditions on the East and West coasts.
To prepare his report, Mr. DiMartino tracked mortgage securities issued by units of Chase Mortgage, Citicorp Mortgage, Countrywide Home Mortgage, GE Capital Mortgage, Prudential Home Mortgage, and Residential Funding Mortgage Corp.
He found that Chase had the fewest defaults in 1990 and 1991, GE had the best performance in 1992, and Chase and Countrywide had the lowest losses in 1993. Citicorp had the highest losses for three years: 1990, 1991, and 1993. Prudential and Residential Funding tied for the bottom spot in 1992.
Citicorp had the highest one-year loss - 2.62% on loans issued in 1990. "Aggressive underwriting" caused the slide, Mr. DiMartino said. Citicorp Mortgage has since tightened operations, a shift that caused loan losses to decline, he said.
Mr. DiMartino attributed Prudential and Residential Funding's high loan losses to the lenders' activities in California at a time when its home values and economy were in steep decline.
