Investments

Fannie Mae completes first credit insurance risk transfer of 2018

Transfers risk on $16.9 billion in single-family loans

Fannie Mae announced it completed its first Credit Insurance Risk Transfer transaction of 2018, transferring risk on $16.9 billion in single-family loans.

The deal, CIRT 2018-1, is part of the company’s ongoing effort to reduce taxpayer risk by increasing the role of private capital in the mortgage market. Fannie Mae has now acquired nearly $5.8 billion in insurance coverage on about $240.8 billion in loans through its CIRT program.

“Our CIRT transactions continue to reduce credit risk for Fannie Mae while bringing private capital to the housing market,” said Rob Schaefer, Fannie Mae vice president for credit enhancement strategy and management. “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.”

The deal, which became effective as of February 1, 2018, specifies that Fannie Mae will retain the risk on the first 50 basis points of loss on its $16.9 billion pool of loans. If this $84.4 million retention layer is exhausted, reinsurers will cover the next 275 basis points of loss on the pool, up to a maximum coverage of about $464.1 million.

Coverage on the deal will be provided based upon actual losses for a term of 10 years. Depending on the paydown of the insured pool and the principal amount of insured loans that become seriously delinquent, the aggregate coverage amount may be reduced at the one-year anniversary and each month thereafter. The coverage may be canceled by Fannie Mae at any time on or after the five-year anniversary of the effective date by paying a cancellation fee.

The covered loan pools for the transaction consist of fixed-rate loans with loan-to-value ratios from greater than 60% to less than or equal to 80%, and original terms between 21 and 30 years. The loans were acquired by Fannie Mae from January 2017 through September 2017.

Experts predicted this credit risk market, which was one of the top bond trades of 2017, will become even more popular in 2018 as more and more traders bet that homeowners won’t default of their mortgages. Time will tell if the program grows in popularity. During 2017, Fannie Mae transferred risk on seven pools through its CIRT program.

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