Investments

Fannie Mae offloads credit risk onto insurers

Completes second deal under Credit Insurance Risk Transfer program

Fannie Mae is joining its GSE counterpart, Freddie Mac, in offloading credit risk onto insurers, as Fannie Mae announced Tuesday that it completed its second credit risk-sharing transaction as part of its Credit Insurance Risk Transfer program.

The Credit Insurance Risk Transfer program shifts credit risk on a pool of loans to a panel of reinsurers. The deal helps to further diversify its counterparty exposure and reduce taxpayer risk by increasing the role of private capital in the mortgage market, Fannie said.

Fannie Mae announced its first CIRT offering in December 2014, and it has now completed its second such deal.

The deal, CIRT-2015-1, became effective on June 1.

Under the structure of the deal, Fannie Mae retains risk for the first 50 basis points of loss on a $4.68 billion pool of loans. If this $23.4 million retention layer were exhausted, reinsurers would cover the next 250 basis points of loss on the pool, up to a maximum coverage of approximately $117 million.

According to Fannie, the coverage is provided based upon actual losses for a term of 10 years.

Depending upon the pay down of the insured pool and the amount of insured loans that become seriously delinquent, the aggregate coverage amount may be reduced at the 3-year anniversary and each anniversary of the effective date thereafter, Fannie said.

Fannie may cancel the coverage at any time after the 5-year anniversary of the effective date by paying a cancellation fee.

According to Fannie Mae, the reference pool of CIRT-2015-1 consists of 30-year fixed rate loans with loan-to-value ratios greater than 60% and less than or equal to 80%.

Fannie Mae acquired the loans from September through December of 2013.

“This transaction represents a continuation of Fannie Mae’s efforts to develop innovative ways to transfer risk to the market and leverage the substantial resources and private capital of the reinsurance industry,” said Rob Schaefer, vice president for credit enhancement strategy & management.

“Our CIRT transactions complement the significant credit risk transfer that we continue to execute through our Connecticut Avenue Securities, and help protect U.S taxpayers from credit losses,” Schaefer added.

“We are pleased that this form of risk transfer has been well received by the market and, based on the indicated support by the reinsurers, we intend to bring similar transactions to the market in the future,” Schaefer concluded.

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