Fannie Mae revs up its credit-risk transfer machinery

The government-sponsored enterprise expects to complete a total of three CRT note offerings this year

HW+ Fannie Mae building

Fannie Mae is once again back in the credit-risk transfer market with a $984 million note offering through its Connecticut Avenue Securities real estate mortgage investment conduit, or REMIC.

The recent offering, CAS Series 2021-R02, was slated to close this week and involves transferring loan-portfolio risk to private investors via a $984 million note offering backed by a reference pool of some 125,000 single-family mortgage loans valued at $35 billion. Fannie plans to bring one more CRT note offering to market this year.

“Our latest deal [CAS Series 2021-R02] was met with high demand from a deep base of investors,” said Devang Doshi, senior vice president of single-family capital markets at Fannie Mae. “Subject to market conditions, we look forward to returning to market [in December] with our final deal of the year, CAS 2021-R03.”

The recent $984 million note offering is Fannie’s second CRT transaction so far this year. In October, the agency made a $1.2 billion CRT note offering, CAS Series 2021-R01, backed by a reference pool of 246,836 single-family mortgages valued at $72 billion.

Prior to restarting CRT offerings this year, the agency had backed away from the market for a time — with its prior CRT transaction closing in March 2020.

“When they do a credit-risk transfer transaction, it’s taking risk from that huge bucket [the reference loan pool] and selling off most of the credit-risk pieces,” said Roelof Slump, managing director of U.S. RMBS at Fitch Ratings. “Fannie Mae had taken a brief hiatus until recently reengaging in this (CRT) market. 

“We’ve been quite active on the Freddie Mac side and expect to rate Fannie Mae’s Connecticut Avenue Securities Trust Series 2021-R02 credit-risk transfer securitization closing in early December.”

Through a CRT transaction, private investors participate with government-sponsored enterprises (GSEs) Fannie and Freddie in sharing a portion of the mortgage credit risk in the reference loan pools retained by the GSEs. Investors receive principal and interest payments on the CRT notes they purchase, but if credit losses exceed a predefined threshold per the security issued, then investors are responsible for absorbing the losses exceeding that mark.

The CAS 2021-R02 offering represents Fannie Mae’s 43rd CAS transaction since the first offering in October 2013. Collectively those CRT deals involved some $49 billion in notes issued against single-family mortgage loan pools valued at $1.6 trillion. Freddie Mac also brought its first CRT deal to market in 2013 and since then “has cumulatively transferred approximately $81 billion in credit risk on approximately $2.5 trillion in mortgages,” a Freddie Mac press release from Nov. 15 states.

Fannie Mae and Freddie Mac’s efforts on the CRT front were bolstered recently by proposed changes to their capital-reserve rules that are being advanced by the Federal Housing Finance Agency (FHFA), which oversees the GSEs. The pending changes were lauded by at least one industry group, the Housing Policy Council (HPC), which represents many of the nation’s leading mortgage originators and servicers.

Ed DeMarco, president of the HPC, recently wrote a letter to the general counsel of FHFA indicating support for the agency’s proposed regulatory-capital rule changes, which include reducing the risk-weight assigned to any retained CRT exposure from 10% to 5%. HPC and other stakeholders argued that the Trump-era rule’s leverage buffer was excessive compared to bank regulators.

That modification of the capital-retention risk weight for CRT exposure, along with other adjustments to the capital-reserve requirements, “would make CRT transactions somewhat more economic” and “expand the risk-reducing and competitive benefits of CRT transactions,” DeMarco’s letter to FHFA’s general counsel states. 

“CRT transactions lessen the systemic risk posed by the enterprises (GSEs) by reducing the concentration of that risk on the enterprises’ balance sheets and the volatility inherent in the credit performance of the enterprises’ guarantee business,” DeMarco wrote in the letter.

“The Housing Policy Council will continue to be an advocate for broad housing-finance reform,” DeMarco said in a prior interview with HousingWire. “And that includes continuing to develop the credit-risk transfer market.

“What FHFA has done the last couple months, signaling a renewed interest in seeing the CRT market develop, that’s really important, and we’re going to continue to promote that.”

The serious delinquency rate for Fannie Mae has been in the 2% range throughout the pandemic.

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