WASHINGTON, DC – Fannie Mae (FNMA/OTC) announced today that it has completed a new credit risk sharing transaction that further diversifies its counterparty exposure and reduces taxpayer risk by increasing the role of private capital in the mortgage market. The credit insurance risk transfer (CIRT™) deal shifts credit risk on a pool of loans to a panel of domestic reinsurers. The CIRT deal also furthers the 2014 Conservatorship Scorecard goal to complete a variety of credit risk sharing transactions in addition to the company’s Connecticut Avenue Securities (CAS) series.
“This unique transaction uses actual losses to calculate benefits, for which risk investors have expressed a preference,” said Andrew Bon Salle, Executive Vice President, Single-Family Underwriting, Pricing and Capital Markets. “This deal complements our current risk sharing offerings focused on capital markets investors and mortgage insurers, and we expect it will be a template for similar transactions that we may execute in the future. The reinsurance market is an attractive potential source of private capital because it currently bears a small amount of U.S. residential mortgage risk. We are pleased to test new and innovative ways to diversify our risk sharing counterparties and to structure this deal in a manner that promotes efficiency and safety.”
In this transaction, CIRT-2014-1 which became effective November 1, 2014, Fannie Mae retains risk on the first 50 basis points of loss on a $6.419 billion pool of loans. If this layer is exhausted, Fannie Mae is provided actual loss coverage for the next 300 basis points of loss on the $6.419 billion pool, up to a maximum coverage of approximately $193 million. The coverage term is 10 years. Depending upon the pay down of the pool and the amount of covered loans that may become seriously delinquent, the aggregate coverage amount may be reduced at the 3-year, 5-year and 7-year anniversaries from the effective date.
The reference loan pool for the transaction consists of 30-year fixed rate loans with loan-to-value (LTV) ratios between 60 and 95 percent. The loans were acquired by Fannie Mae from January through March of 2014. Loans over 80 percent LTV are already covered by primary mortgage insurance, and this credit risk transfer provides supplemental coverage for losses that exceed that covered by primary mortgage insurance.
Fannie Mae’s Credit Risk Sharing initiatives aim to reduce our mortgage default (credit) risk by offering new opportunities for financial institutions to invest in the credit performance of our single-family book of business.
Credit Risk Sharing:
Provides an additional avenue for sharing our mortgage credit risk.
Adds a layer of defense against loss to existing credit risk policies and processes.
Seeks to reduce the government’s participation in the mortgage market.
Benefits:
Enhances our ability to manage credit risk.
Allows us to share credit risk on our guaranty book of business with private market participants.
Reduces taxpayers’ credit risk exposure on Fannie Mae’s guaranty business.
Fulfills our public policy goal to re-start private investment in mortgage credit risk and aligns with objectives set forth in FHFA’s 2013 Conservatorship Scorecard.
Our goal is to develop multiple forms of risk-sharing with private market participants. Below are examples of transactions we are using to share credit risk.
Connecticut Avenue Securities are designed to share credit risk on a portion of our strongest performing single-family book—newly-originated, qualifying mortgage loans that are underwritten using strict credit standards and enhanced risk controls (implemented post housing crisis). Fannie Mae’s first credit-linked debt offering was priced on October 15, 2013. The Connecticut Avenue Securities program aims to offer ongoing investment opportunities that are scalable, and flexible enough to respond to market feedback, and are designed to have minimal, if any, impact on the To Be Announced (TBA) market.
An agreement with National Mortgage Insurance Corp. (National MI) to insure a pool of loans with an unpaid principal balance of over $5 billion was executed on July 15, 2013. This transaction entailed using a pool mortgage insurance policy to transfer a portion of the risk on a pool of high quality loans that Fannie Mae acquired in the fourth quarter of 2012. Read more information on the NMI transaction.
Credit insurance risk sharing deals shift credit risk on a pool of loans to an insurance provider who then transfers that risk to one or more reinsurers. The reinsurance market is a significant and attractive potential source of private capital because it currently bears a small amount of U.S. residential mortgage risk and its other forms of risk are not correlated to Fannie Mae’s to any meaningful degree
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