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INVESTMENT GOVERNMENT PROPERTY PRESERVATION TECH
COVID-19'S
IMPACT ON
MORTGAGE-
BACKED
SECURITIES
Fitch Ratings is raising concern that the
government-sponsored enterprises' (GSEs)
response to the COVID-19 pandemic is having
a problematic impact on their mortgage-backed
securities (MBS) issuances.
Fitch noted that its rating actions prior to
the pandemic's onset were mostly positive for
the GSEs' risk transfer deals. But on May 19,
Fitch placed seven initial exchangeable classes
on Rating Watch Negative and revised the
Rating Outlook to Negative from Stable on
five additional tranches from 15 Fannie Mae
and Freddie Mac credit risk transfer (CRT)
transactions issued between 2013 and 2015
and one private label CRT transaction issued
in 2018.
Suzanne Misretta, Senior Director at Fitch,
explained this sudden shift to pessimism was
the result of the GSEs' acknowledgment of the
pandemic.
"Both GSEs have not responded to the
coronavirus pandemic in the same manner they
have for natural disasters such as hurricanes in
the past," Mistretta said.
Misretta highlighted Fannie Mae's
Connecticut Avenue Securities (CAS) series
from 2013 and 2014 (C01) and Freddie Mac's
Structured Agency Credit Risk (STACR)
series from 2013 and 2014 (DN1 and DN2)
for failing to carry provisions for grace periods
or credit event reversals, adding they lacked the
flexibility to address natural disasters and, thus,
were among the transactions most at risk given
the current environment.
"Some fixed severity deals have either a
grace period or reverse credit event that lessens
the impact of affected borrowers," Mistretta
said. "at said, some bonds are at risk of
permanent interest shortfalls since the interest
paid will be calculated off of the written down
bond balance until the reference pool and
bonds are written back up."
Misretta added that the GSEs' lack
of pandemic response and the rigidity of
structure in their MBS issuances could result
in downgrades of some tranches to speculative-
grade, reflecting either an elevated vulnerability
of default risk or that default risk is present.
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