GSE risk-sharing deals near half-trillion-dollar market

Fannie, Freddie quadrupled issuance in 2014

Fannie Mae and Freddie Mac more than quadrupled their issuance of risk-sharing deals in 2014, as the government-sponsored enterprises continue their efforts to limit the American taxpayer’s liability.

According to a new report from Fitch Ratings, the GSEs issued their first three risk-sharing deals in 2013 with a total reference pool of $84.7 billion. But in 2014, the GSEs upped the risk-sharing ante significantly, issuing 11 total deals with a total reference pool of $369.7 billion.

The GSEs first began offering the credit risk-sharing deals in 2013, as a means to attract private capital back to the mortgage market, and according to Fitch’s data, that’s just what the GSEs have done, to the tune of $454.4 billion.

Reducing taxpayer risk is one of the main goals that the Federal Housing Finance Agency laid out for the GSEs. In fact, reducing taxpayer risk makes up 30% of the FHFA’s scorecard for the GSEs.

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 also offered up credit risk-sharing deals in the form of its Structured Agency Credit Risk transactions, called STACR for short. Freddie has also offloaded credit risk in the form of its Agency Credit Insurance Structure, which is intended to attract private capital from non-mortgage guaranty insurers and reinsurers.

And according to Fitch’s report, the underlying mortgages are performing remarkably well so far, a result of tighter lending standards.

“Agency mortgages included in recent reference pools are continuing to show better credit attributes than historical averages,” said Fitch Managing Director Grant Bailey. “Even compared with strong-performing vintages originated prior to 2005, the GSE reference pools have significantly higher average FICO scores.”

One reason for the improved performance of the more recent mortgages is the “significantly higher” average FICO scores of the borrowers compared to other strong-performing vintages. According to Fitch’s data, the original FICO score of the borrowers in the credit-risk sharing deals is 758.

Those mortgages are also performing well in terms of payment behavior as well. “The clean payment behavior to date reflects the high credit quality of the borrowers,” Fitch said in its report. “Of the mortgage loans included in the transactions issued to date, only 22 basis points are currently delinquent.”

Fitch also reports that prepayments have varied by origination date for the mortgages that make up the risk-sharing deals.

“Prepayment speeds have averaged above 15% for loans originated within the past year and after the increase in mortgage rates in the second half of 2013,” Fitch said in its report. “Prepayment speeds remain below 10% for older loans with lower initial coupons.”

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