Freddie Mac announced Tuesday that it is now making all available pricing and deal terms for their Agency Credit Insurance Structure and Whole Loan Securities transactions, which are important offerings in its credit risk transfer (CRT) program, open to the public to further transparency for investors. Both build on similar disclosures for Freddie Mac's Structured Agency Credit Risk (STACR) program.
In a corresponding Freddie Mac Perspectives blog, Kevin Palmer, SVP of Single-Family Credit Risk Transfer, explained how CRTs are indicating whether Freddie's Guarantee fees (G-fees) are in line with what the private market would charge.
G-fees are a retained amount of payments received on mortgages sold to Freddie Mac by banks and other sellers. In return, Freddie guarantees payment of principal and interest on the pass-through securities that they issue to their customers, or Gold PCs.
“The G-fee essentially covers the cost of providing the credit guarantee—both the non-credit costs, such as administrative costs, and credit costs, which are the expected costs plus the cost of unexpected losses,” Palmer said.
Though the G-fee normally would be for costs Freddie Mac could incur if they retained all the credit risk related to loans in their mortgage securities, the last four years they have been transferring a significant portion to the private market through their Single-Family CRT program.
To calculate the G-fee, Freddie analyzes the cost of the past years Structured Agency Credit Risk (STACR) transactions and determines the market-implied G-fee for the lower range of what the private sector would be willing to pay to operate a credit guarantee business like Freddie Mac’s.
According to Palmer, “CRT is not only shifting risk away from taxpayers and creating new asset classes for investors, it is a key benchmark for policy discussions by providing information about what the private capital markets would charge for absorbing the credit risk generated by the credit guarantee business of a GSE.”