GSEs Finish Credit Risk Sharing for 2015 on a Strong Note

With no end to the FHFA’s conservatorships of the GSEs in sight after more than seven years, Fannie Mae and Freddie Mac are both heavily engaged in transferring credit risk on single-family mortgage loans to the private sector in order to remove some of the risk for taxpayers.

Both GSEs have announced the completion of their final risk transaction of 2015 as of late last week, and the FHFA said last week in the GSEs’ scorecard for 2016 that the Enterprises plan to transfer credit risk on at least 90 percent of the unpaid principal balance (UPB) of newly-acquired single-family mortgages in loan categories targeted for risk transfer.

Fannie Mae’s final credit risk transfer deal of 2015, known as CIRT 2015-6 (Credit Insurance Risk Transfer), is unique from previous CIRT transactions because the loan pool covered includes 5/1, 7/1 and 10/1 fixed period adjustable rate mortgages (ARMs), which allows Fannie Mae to offer a new investment opportunity to reinsurers. Through six CIRT transactions since the program’s inception in 2014, Fannie Mae has acquired more than $1.2 billion of coverage on more than $46 billion of loans. More than $1 billion of that CIRT insurance acquired by Fannie Mae on more than $40 billion in loans has occurred in 2015.

“Fannie Mae remains focused on advancing and driving strong interest and results for our credit risk transfer programs that help shift risk away from the company and to holders of private capital, reduce taxpayer risk and help create a safer, stronger housing finance system,” said Rob Schaefer, VP for credit enhancement strategy & management. “With our final CIRT deal of 2015, we continued to find ways to interest reinsurers with access to varied loan collateral by introducing ARM loans to our transactions. Insurers and reinsurers tell us that they value our commitment to engage their industry through our CIRT program, and the unique, customized risk opportunities that CIRT can offer, helping insurers and reinsurers to expand their risk portfolio.”

CIRT 2015-6 became effective on November 1, 2015; on this transaction, Fannie Mae retains the risk for the first 50 basis points of loss on an $8.2 billion pool of loans, according to the GSE.

Another of Fannie Mae’s innovative credit risk transfer programs, Connecticut Avenue Securities (CAS), has sold more than $12.4 billion in securities to private investors, which covers $438 billion worth of mortgage loans since the program’s inception in September 2013.

“Fannie Mae remains focused on advancing and driving strong interest and results for our credit risk transfer programs that help shift risk away from the company and to holders of private capital, reduce taxpayer risk and help create a safer, stronger housing finance system.”

Rob Schaefer, Fannie Mae VP for credit enhancement strategy & management

In late November, Fannie Mae’s fellow GSE, Freddie Mac, announced its eighth and final credit risk sharing transaction of 2015, STACR 2015-HQA2 (Structured Agency Credit Risk). Freddie Mac’s risk-sharing initiatives include 17 STACR debt note offerings and 11 Agency Credit Insurance Structure (ACIS) transactions since becoming the first agency to market credit risk transfer transactions with STACR and ACIS in the middle of 2013. Since then, Freddie Mac has grown its investor base to more than 170 unique investors, including reinsurers. The Enterprise has laid off a substantial portion of credit risk on single-family mortgages totaling $384 billion in UPB.

Both Fannie Mae and Freddie Mac have announced that their respective credit risk sharing initiatives (CIRT and CAS for Fannie Mae, STACR and ACIS for Freddie Mac) will continue in 2016 in order to allow more participation from the private sector in the U.S. housing market.