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Monday Morning Cup of Coffee: Judge deals major blow to investors in GSE lawsuit

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Freddie Mac continues to offload credit risk

GSE inks insurance deal to cover $77M in risk

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Freddie Mac made headway in limiting its credit risk after inking a deal with a private insurer to guaranty a pool of single-family loans funded in the third quarter of 2012.

The mortgage giant announced Tuesday that it obtained an insurance policy underwritten by Arch Reinsurance to insure up to $77.4 million in credit losses.

The new insurance coverage is intended to attract new sources of private capital from non-mortgage guaranty insurers by taking on a portion of the credit risk associated with some of Freddie's home loan portfolios.

"This is part of our business strategy to expand risk-sharing with private firms, thus reducing taxpayers' exposure to losses from mortgage foreclosures," said David Lowman, executive vice president of single-family business for Freddie Mac.

He added, "We have brought to the market new sources of capital for transferring mortgage credit risk away from taxpayers. We've tapped into the global insurance community's appetite for mortgage credit exposure, and would like to do more of these policies in the future."

Freddie Mac has led the market in new risk-sharing initiatives, issuing two Structured Agency Credit Risk debt offerings, which were among the largest credit securities offerings in the market.

Fannie Mae is not far behind, issuing deals that are extremely similar to its sister agency this year to entice private capital back into the market. The enterprise has formally stated that it will issue its next transaction in 2014. 

These credit risk initiatives support the Federal Housing Finance Agency’s goal outlined in the 2013 scorecard for the government-sponsored enterprises to demonstrate the viability of multiple types of risk transfer transactions involving single-family mortgages.

"FHFA is pleased that Freddie Mac has completed another risk-sharing transaction – an insurance policy with Arch Reinsurance Ltd. that covers up to $77.4 million of potential losses on a pool of loans guaranteed by Freddie Mac," said FHFA Acting Director Ed DeMarco.

He added, "The completion of this deal is unique in that it is with a diversified non-mortgage insurer and it demonstrates yet another approach to risk-sharing with investors."

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