Fannie Mae proposed a new structure to its benchmark Connecticut Avenue Securities credit risk transfer program to potentially help draw in more Real Estate Investment Trust (REIT) investors.

The government-sponsored enterprise explained that the goal of the enhancement is to expand the overall potential investor base for these securities, making the program more attractive to other investors as well, and limiting investor exposure to Fannie Mae counterparty risk.

This particular enhancement would enable Fannie Mae to structure future CAS offerings as notes issued by trusts that qualify as Real Estate Mortgage Investment Conduits (REMICs).

Fannie Mae stated it would facilitate this change by making a REMIC tax election on a majority of single-family loans that it acquires and guarantees.

However, REMICs are not new to the market. There was a lot of controversy surrounding REMICs after the financial crisis but they have since gone out of the market. This article on Re-REMICs in The Atlantic by Daniel Indiviglio explains the fears some held to the legacy product.

Fannie Mae's offer is nothing like those Re-REMICs from 2009.

In order to be sure that it is avoiding any disruption of the To-Be-Announced (TBA) Mortgage Backed Security (MBS) market, Fannie Mae stated that it publishing this announcement in order to validate that assessment prior to implementing such change. A fact sheet on the announcement can be found here.

As added background, the CAS program was launched in 2013 and created a new market for investing in mortgage credit risk. CAS deals are designed to share credit risk on a portion of Fannie Mae’s strongest performing single-family book. 

Freddie Mac released a similar proposal, announcing that it’s contemplating making a change to the structure of its Structured Agency Credit Risk (STACR) transactions in order to try and gain more investors.

Freddie Mac also noted that it published the announcement in order to be sure that it is avoiding any disruption of the To-Be-Announced (TBA) Mortgage Backed Security (MBS) market.

A Federal Housing Finance Agency spokesperson added, “FHFA continues to encourage Fannie Mae and Freddie Mac to explore different credit risk transfer structures and ways to expand the investor base. Therefore, we are pleased that Fannie Mae and Freddie Mac are going to explore an innovation to their credit risk transfer programs involving credit linked notes and that they will engage with stakeholders and gather feedback about this approach.” 

“FHFA continues to monitor this closely to make sure it is consistent with our CRT principles to ensure an efficient To Be Announced market and attract a diversified and broad investor base. We want to fully understand the implications before any action is taken,” they stated.