With investor response to the credit risk-sharing deals from Fannie Mae and Freddie Mac continuing to be positive, look for GSE risk-sharing deals to become more common in the future, Fitch Ratings said in a new report.
According to Fitch’s report, the response to Freddie Mac’s two actual loss Structured Agency Credit Risk deals shows that investors are willing to buy more risk.
“The significance of the actual loss deals is that they increase the amount of risk that the GSEs are able to offload,” said Fitch Director Sean Nelson. “We expect actual-loss transactions to become more common in the future as they provide this type of risk-offload for the GSEs and are likely more sustainable over the long-run.”
In addition to increased activity from Freddie Mac, Fannie Mae is expected to issue their first actual loss risk-sharing transaction later this year, Fitch said.
According to Fitch’s report, GSE risk-sharing transactions are expected to contribute a consistent supply to the market for the foreseeable future.
The first half of 2015 started off strong, with Fannie and Freddie issuing roughly $6.8 billion, which would put 2015’s issuance on pace to surpass 2014’s total issuance of roughly $10.8 billion.
Fitch’s report states that the structure and foundation of the GSEs’ risk-sharing deals will serve investors well moving forward.
According to Fitch’s report, the deals have strong credit characteristics, clean performance to date with limited repurchases thus far.
“Agency mortgages included in recent reference pools have better credit attributes than historical averages,” Fitch said in its report, noting that when compared with strong-performing vintages, like those prior to 2005, the reference pools have significantly higher average FICO scores (758 versus 716).
Fitch also said that the high credit quality of the borrowers is reflected in the clean payment history of the deals. According to Fitch’s data, of the mortgage loans include in all of the risk-sharing deals since 2013, only 29 basis points are currently delinquent.
The repurchases on the underlying loans have been limited as well.
“While the rate of repurchases, compared with credit events, has slowed of late, both metrics make up an immaterial amount of the total pool at less than three basis points each,” Fitch said.