Fannie Mae just rolled out the first credit insurance risk transfer program in the multifamily industry.
The first transaction under the new program was announced last week, an $11.1 billion Credit Insurance Risk Transfer transaction covering multifamily loans originated between October 2017 and January 2018 and deferring that risk to seven undisclosed insurers and reinsurers.
It is important to note that this risk transfer is on the two thirds of risk the Fannie Mae holds on each of the loans its Delegated Underwriting Servicing lenders originate. DUS lenders hang on to the remaining third of the total risk.
Fannie Mae Vice President of Multifamily Jonathan Gross said the launch of this program accomplishes two main objectives near and dear to the government sponsored enterprise's heart: First, it lowers taxpayer risk, and second, it opens up a whole new capital stream for the multifamily industry, which Gross says is part of Fannie’s mission to structurally increase the liquidity, stability and sustainability of the market.
“This allows us to bring in an additional source of capital into the multifamily market. Before we developed these transactions and developed them into a program, there wasn’t really any reinsurance capital connected into the multifamily market,” Gross told HousingWire.
“Anything that we can do to structurally increase sources of liquidity in the multifamily market is something that we view as core to our mission,” he added.
The multifamily CIRT program is built on the shoulders of the single-family CIRT program.
Back in 2014, Fannie rolled out single-family CIRTs with the intent of offering insurers and reinsurers the diversification they craved in their risk portfolios.
“The value proposition to the reinsurance community was that these guys have large exposures to property casualty risks…that they are reinsuring, as well as catastrophic risks: storms, floods, etcetera. So, they were looking for additional types of risk that would diversify their portfolios,” Gross told HousingWire.
The same draw applies to the multifamily version of the CIRT program with the added benefit of pairing nicely with pre-existing single-family risk portfolios.
“That was the premise behind the single-family CIRT programs, and we in the multifamily identified an opportunity to basically apply the same thing and say, ‘here’s another class of risk which is not highly correlated to your core property casualty and catastrophic risk books as well as provides a natural hedge to single-family risk,’” Gross continued.
According to Gross, reinsurance capital is extremely savvy and all about the numbers. Risk adjusted return is the name of the game, and with serious delinquencies at a paper-thin 0.09% for Fannie’s multifamily loan portfolio in tandem with strong market fundamentals, these CIRTs are looking very attractive to risk capital as a stable investment.
Gross said the other factor putting wind in the multifamily CIRT sails is the DUS program’s strong performance history.
“The history of the DUS program really, really helped us because we could point to something where there’s 30 years of history, and if you flip back to 1988 and you think about all the different things that have happened from the early 90s recession to the Asian Debt Crisis, to the Dotcom Bust, to The Great Recession, and that I think gives [investors] a lot of comfort,” Gross said.
Fannie Mae originally floated the multifamily CIRT product in 2016 and then again in 2017 before deciding the market was ready for multifamily CIRTs to become a full-fledged program.
Going forward, Gross says there is one more CIRT transaction planned for the end of the year, and that Fannie Mae Multifamily plans to do two to three CIRTs per year from here on out.
These will look very similar to the one that just posted and will typically be composed of loans in the multifamily portfolio with unpaid balances of less than $30 million, which Gross says investors have expressed the most interest in.
“To our knowledge, this is really the first set of offerings that are focused on multifamily collateral and the reinsurance space. We see that as an important goal of ours, to find new and innovative ways of connecting the multifamily asset class to additional sources of capital. We think this is a really good opportunity to do that,” Gross said.