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Fannie Mae continues shifting credit risk to insurers

Completes fifth and sixth Credit Insurance Risk Transfer deals

As part of its effort to reduce the taxpayers’ burden, Fannie Mae announced Friday that it completed its fifth and sixth credit risk-sharing transactions 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 Mae said.

The latest CIRT deals are Fannie Mae’s fourth and fifth such deals in 2015, and the fifth and sixth since the program launched in Dec. 2014.

The two deals, CIRT 2015-4 and CIRT 2015-5, shift credit risk on pools of single-family loans to both an insurer and reinsurers, Fannie Mae said.

For the first time since the program’s inception, Fannie Mae completed a transaction directly with a multi-line insurer, CIRT 2015-5, which will allow for greater capacity to shift credit risk to private capital.

Also for the first time, the covered loan pools for the CIRT 2015-4 and 2015-5 transactions consist of 30-year fixed rate loans with only loan-to-value ratios greater than 80%, Fannie Mae said.

According to Fannie Mae, the loans were acquired from September through December 2013 and April through December 2014. In these two deals, the combined unpaid principal balance on the reference loans is also larger than previous CIRT deals, with the total UPB at just over $12 billion.

In CIRT-2015-4, which became effective Oct. 1, 2015, Fannie Mae retains risk for the first 50 basis points of loss on a $7.4 billion pool of loans.

If this $37 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 $185 million.

With CIRT-2015-5, which also became effective Oct. 1, 2015, Fannie Mae retains risk for the first 50 basis points of loss on a $4.9 billion pool of loans.

If this $24 million retention layer were exhausted, the insurer would cover the next 250 basis points of loss on the pool, up to a maximum coverage of approximately $121 million.

In both deals, coverage is provided based upon actual losses for a term of 10 years.

According to Fannie Mae, 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 Mae also noted that it may cancel the coverage at any time on or after the 5-year anniversary of the effective date by paying a cancellation fee.

Through these latest deals, Fannie Mae said that it has acquired more than $800 million of insurance coverage on over $32 billion of loans this year with five CIRT transactions, and nearly $1 billion of coverage on over $38 billion of loans since the program's inception in 2014.

By the end of 2015, Fannie Mae said that it anticipates it will have transferred a portion of the credit risk on approximately half a trillion dollars in single-family mortgages through all of its credit risk transfer efforts, including CIRT, Connecticut Avenue Securities and other forms of risk transfer.

“Through our issuance of Connecticut Avenue Securities and execution of Credit Insurance Risk Transfer transactions, Fannie Mae is leading the credit risk transfer market,” said Rob Schaefer, vice president for credit enhancement strategy & management, Fannie Mae.

“Our CIRT program continues to grow, as interest from participating reinsurers is reinforced by Fannie Mae’s strong credit risk management approach, the increasing familiarity and simplicity of our transaction structure, and the opportunity to gain exposure to recent vintage U.S. mortgage credit risk,” Schaefer continued.

“Through CAS and CIRT, we have been sharing risk on approximately 90% of the 30-year fixed rate loans that we have recently acquired, with loan-to-value ratios in excess of 60% and not originated under the Home Affordable Refinance Program,” Schaefer added. “With our commitment to build market liquidity and share risk, we continue to expand our reinsurer and insurer partners, complementing Fannie Mae’s other credit risk transfer efforts.”

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