Estimating Agency MBS Loss Given Default

Summary

The discussion considers how to estimate loss given default (LGD) for agency mortgage-backed securities when a capital framework requires a figure despite the perception that the agencies have not defaulted. It suggests non-agency prime residential MBS as a possible proxy, while noting differences in loan profiles and underwriting standards that can limit comparability.

The replies point to the 2008 credit events involving Fannie Mae and Freddie Mac as a historical benchmark, describing senior securities that settled near par and therefore implied relatively small losses. They also suggest using agency loan-level datasets to model defaults and severity directly. The discussion is brief and does not provide a complete LGD methodology, sample design, or treatment of recovery timing; the settlement observations and proxy comparisons should not be taken as a universal estimate for all agency MBS.

Key ideas

• Historical credit events involving Fannie Mae and Freddie Mac can inform agency MBS LGD estimates.
• Senior securities settled near par in the cited 2008 auctions, suggesting limited losses in that episode.
• Non-agency prime RMBS may serve as a proxy, but loan characteristics and underwriting can differ.
• Agency loan-level data can support direct modeling of defaults and loss severity.

Tags

# Loss given default for Agency MBS


# Loss given default for Agency MBS












The question is regarding the LGD of Agency MBS. Although Agencies never defaulted, the Basel framework requires to calculate the Agency MBS LGD for capital requirement. The closest benchmark I can think of is to take the LGD of non agency Prime RMBS as a proxy. Can anyone think of any other benchmark?

## Answer by dm63 (score 2)

https://quant.stackexchange.com/a/24921

Yes they did, in 2008. On October 6, 2008 ISDA held a credit default auction with Fannie Mae and Freddie Mac as Reference Entities that defaulted. The senior securities settled at about 91.5 and 94 respectively, if memory serves. Hence there was very little loss given default.

## Answer by toing (score 1)

https://quant.stackexchange.com/a/60820

Agency mortgages are very different as they are written to different origination guidelines controlled by agencies. Non agency prime MBS comes close to it but they can have different profiles as mostly these are high balance loans that didnt satisfy conforming limits for agency programs.

These days, fannie mae as well as freddie mac release loan level data that can help model defaults as well as severity. for example, i am linking to freddie mae data set.

http://www.freddiemac.com/research/datasets/sf_loanlevel_dataset.page

You should try these data sets now.

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