Fitch: GSE risk-sharing deals could exceed $400 billion

Predicts quarterly issuance by both GSEs going forward

As the roles of Freddie Mac and its government sponsored enterprise counterpart, Fannie Mae, have grown in the housing market, both enterprises have looked to various methods to share some of the credit risk that stems from their support of the mortgage market.

A new report from Fitch Ratings suggests that the risk-sharing deals are “picking up a head of steam” and could be headed toward $400 billion in total volume and beyond.

Stretching back into 2013, both GSEs have offered up credit risk-sharing deals in various forms. Fannie has offered up several risk-sharing deals under its Connecticut Avenue Securities platform.

Freddie has also offered up credit risk-sharing deals in the form of its Structured Agency Credit Risk transactions, called STACR for short.

Until breaking new ground in August, the previous Freddie STACR offerings were all supported by loans that carried loan-to-value ratios of between 61%-80%, with an average LTV of roughly 75%.

In the August deal, called STACR 2014-HQ1, Freddie offered up a deal supported by loans with LTV ratios of somewhere between 80% and 95%. The average LTV was 92% and the pool carried a balance of $9.975 billion, spread across 45,112 loans.

And in September, Freddie doubled down with another high-LTV ratio deal, with the second one being much larger than the first high-LTV offering. STACR 2014-HQ2 carried an unpaid principal balance of $33.43 billion and a weighted average LTV of 91.6%.

In its new report, Fitch said that these types of deals will continue. “Risk-sharing transactions completed through the first three quarters of 2014 reference mortgage pools of close to $300 billion after totaling just over $80 billion for all of 2013,” said Fitch Ratings Managing Director Grant Bailey.

“With additional transactions likely before year end, the amount of mortgage pools referenced is on pace to approach $400 billion.”

All told, there have been 11 risk-sharing deals to date with a total reference pool of $376.8 billion.

Fitch cites the strong credit characteristics of the risk-sharing deals as a positive indicator for the future of the deals. “Agency mortgages included in recent reference pools have better credit attributes than historical averages,” Fitch said in its report.

“Even compared with strong-performing vintages, such as those prior to 2005, the reference pools have significantly higher average FICO scores (760 versus 716).”

The risk-sharing deals have also displayed clean payment performances to date and the amount of repurchases has been limited thus far.

“The clean payment behavior to date reflects the high credit quality of the borrowers,” Fitch said. “Of the mortgage loans included in the transactions issued to date, only 20 basis points are currently delinquent. Repurchases outnumber credit events by roughly two to one to date but remain an immaterial amount of issuance.”

Fitch predicts that Fannie and Freddie will continue to issue the credit-linked notes on a quarterly basis going forward. 

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