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Industry Insight: The Future of Fannie Mae’s Credit Insurance Risk Transfers

bob-schaeferRob Schaefer serves as VP of Credit Enhancement Strategy and Management. Schaefer is responsible for the development and management of Fannie Mae’s comprehensive approach for transferring credit risk to insurance providers, enhancing the company’s ability to manage the credit risk for its book of business under varying economic scenarios. Additionally, he is responsible for managing Fannie Mae’s engagements with, and counterparty risk to, approved mortgage insurers.

Schaefer previously held several positions throughout Fannie Mae’s Single-Family division, including director of Product Development and Program Management, Credit Enhancement, and director of the Trading Desk.

DS News spoke with Schaefer to discuss Fannie Mae’s Credit Insurance Risk Transfer program and what potential bidders can anticipate with these transactions in the new year.

What makes the Credit Insurance Risk Transfer Program different from other Credit Risk Transfer programs offered by Fannie Mae?

Our Credit Insurance Risk Transfer program, or we call it CIRT, is designed to tap insurance and reinsurance providers in the market. Risk transfer now, it's part of Fannie Mae's core strategy for how we manage our own risk, and how we protect against unexpected market stress cycles, and also protect tax payers by transferring risk away from Fannie Mae to private capital.

We have a number of different vehicles for doing that. Most of our risk transfer is done through two vehicles. Our flagship is Connecticut Avenue Securities, and that's our securitization vehicle for transferring our risk. It's been very successful.

CIRT was developed to tap the insurance and reinsurance counter parties that aren't able to fully participate in CRT transactions, because they generally want to do their risk transfer in the form of insurance. We did our first CIRT transaction in 2014. So far, we've done 17 CIRT transactions since then.

For this fiscal year, what has been successful about these CIRT offerings?

The number of active insurance and reinsurance companies that have expressed interest in CIRT continues to grow. We're approaching 20 active market participants. I think what interests them, number one, is the consistencies of how we come to market. It takes time for a company that has not insured mortgage credit risk before to devote the resources and the time to understand that risk. Insurance and reinsurance companies are not going to do that if they are not confident that there's going to be more risk or more potential opportunities going forward for them to write insurance.

We've, so far, covered over $124 billion of our loans through CIRT. We are generally covering about 20 to 25 percent of our risk transfer needs through CIRT. This is a very attractive product offering for insurance and reinsurance companies to get involved with because it's actually one of the growing segments in the reinsurance market. There's a lot of excitement about learning what this is all about and ultimately participating in our deals.

The other attractive piece of this for the reinsurers and insurers is how we've approached this market. We started off with a strategy of being as transparent as we possibly could about how we understand and how we analyze the risk. We have made available, for free, millions and millions of data records on our loans going all the way back to loans that we've acquired since 2000, which provides an enormous free database for anybody to go in and analyze the data, build models. It's almost unprecedented in the world of insurance and reinsurance to have that much data to start off with to help understand the risk. We continue to build that out as well.

Just the tools that we're giving has really facilitated the entry of a number of companies. It's really built a level of excitement for this product that I think is very exciting for us as well.

Moving into the new year, what can potential bidders anticipate with CIRT offerings?

Connecticut Avenue Securities generally covers 70 to 75 percent of our risk transfer needs. CIRT has been covering 20 to 25 percent. Then there's some lenders that actually also like to invest in their own mortgage credit risk as well and we do some risk sharing with lenders as well. We would expect, barring any significant changes in the market or in pricing, to do next year around 20 to 25 percent of our risk transfer needs through CIRT. In 2016 alone, we covered more than $77 billion of our loans through CIRT. In 2017, we'd expect the volume covered through CIRT to be somewhat comparable to that, barring any material changes in our pricing execution.

Again, this year we primarily covered loans that are in our targeted loan categories, that's generally 30-year loans that have LTVs of greater than 60 percent. As we announced last week, we also are exploring other product types where it makes economic sense to transfer the risk, and where we think there may be an appetite on the part of our risk transfer partners to write coverage on that risk. This past offerning which we announced last week was for a product that we had not previously covered, and that's 15 and 20-year product. Next year I would expect that we'd do a comparable amount of volume based upon the execution that we just realized with this 15 and 20-year deal. We would expect that we might want to repeat that again in 2017.

About Author: Kendall Baer

Kendall Baer is a Baylor University graduate with a degree in news editorial journalism and a minor in marketing. She is fluent in both English and Italian, and studied abroad in Florence, Italy. Apart from her work as a journalist, she has also managed professional associations such as Association of Corporate Counsel, Commercial Real Estate Women, American Immigration Lawyers Association, and Project Management Institute for Association Management Consultants in Houston, Texas. Born and raised in Texas, Baer now works as the online editor for DS News.

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