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Some Years Produced Many Sour Mortgage Conduits: Kroll

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When the conduits that pumped commercial mortgage loans into mortgage-backed securities from 1995 through 2008 failed, they seemed to fail in predictable ways, according to a new analysis from the Kroll Bond Rating Agency.

(Related: Mortgage Investors Seek Safety Before Fed’s $1.7 Trillion Flood)

Mark McDevitt and other KBRA analysts have published data supporting that view in a look at how the conduits in operation from 1995 through 2008 performed.

The topic is of keen interest to life insurers, because U.S. life insurers hold more than $500 billion in mortgage-backed securities.

The KBRA analysis included 523 conduits that handled loans with an original balance of $845 billion. Borrowers have retired 281 of the transactions; 242 of the transactions are still active. Borrowers owe $16 billion on the 1,565 loans that are still active.

The full 523-conduit group has experienced $58 billion in losses, or losses equal to 6.9% of the original mortgage loan balance, according to the KBRA analysts.

When the KBRA analysts grouped the failures by the year the conduits came to life, they found that the conduits originated in 2004 or earlier all had losses under 6% of the original loan balance.

Conduits with origination years from 2005 through 2008 all had losses, or totals of actual losses and projected losses, over 10% of the original balance. The analysts are expecting the failure rate for the 2008 vintage to be about 16%.

Conduit makers used “credit enhancement” processes to get slices of conduit deals up to a high rating level starting in 2005, and that, questionable performance projections, and high loan-to-value ratios seem to account for many of the problems with the 2005-2008 vintages the analysts write.

Within each origination year, the transactions that looked as if they made more financial sense from the start generally had lower lifetime losses, the analysts write.

Resources

The KBRA report is available here, behind a log-in wall. Accounts are free.

— Read Mortgage-Backed Securities Growth Reflects Blazing Real Estate Marketon ThinkAdvisor.

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