Fannie Mae took two major steps this week in achieving its goal of increasing the role of private capital in the mortgage market through credit risk transfers in order to reduce taxpayer risk, as set forth by its conservator, the Federal Housing Finance Agency (FHFA).
On Thursday, with the announcement of a $1.56 billion credit risk sharing transaction under the Connecticut Avenue Securities (CAS) series, Fannie Mae has now issued $10 billion in notes through CAS since the program began in October 2013. In less than two years, the Enterprise has transferred risk to private investors on single-family mortgage loans with an unpaid principal balance (UPB) of more than $390 billion.
"Despite various factors causing uncertainty in many global markets, we brought another successful CAS deal to the market and attracted new investors to the program," said Laurel Davis, VP for credit risk transfer at Fannie Mae. "As the leading manager of credit risk in the industry, we focus on consistent underwriting standards, cutting-edge quality control tools, and superior loss mitigation practices to reduce credit losses, which benefits our CAS investors. Our strategy has been to come to market once a quarter with regular, consistent transactions that investors can plan for and we continued to demonstrate that philosophy with this deal. Feedback from investors in the program continues to be overwhelmingly positive."
The risk sharing transaction announced Thursday, the CAS 2015-C03, is the eighth in the series for Fannie Mae. It is scheduled to settle on July 22, according to the Enterprise. The reference pool for the transaction consists of about 225,000 single-family mortgage loans Fannie Mae acquired from May through August 2014. The loans in the reference pool, which total about $48.3 in outstanding UPB, are part of the Enterprise's book of business underwritten using strong credit standards and enhanced risk controls, according to Fannie Mae. The loans are fixed-rate, generally 30-year term, fully amortizing mortgages, and are divided into two groups: one with LTV ratios between 60 and 80 percent and one with original LTV ratios between 80 and 97 percent.
"Fannie Mae anticipates that CAS 2015-C03 will be its final fixed severity deal and, subject to market conditions, expects to come to market with its first actual loss deal as early as the fourth quarter of 2015," Fannie Mae said in the announcement.
Fannie Mae announced it would continue to reduce risk to taxpayers through additional forms of risk transfer with its reinsurance transfer. One such transaction took place earlier this week on Tuesday, when Fannie Mae announced it had completed an additional Credit Insurance Risk Transfer (CIRT) transaction, shifting credit risk on a pool of loans to a panel of reinsurers.
This transaction, known as CIRT-2015-1, became effective on June 1 and helps Fannie Mae meets its goals related to increasing the role of private capital in the mortgage market through risk transfers, as outlined in the 2015 FHFA Conservatorship Scorecard. The reference pool consists of 30-year fixed-rate loans with LTV ratios between 60 and 80 percent and were acquired by Fannie Mae from September through December 2013.
"This transaction represents a continuation of Fannie Mae’s efforts to develop innovative ways to transfer risk to the market and leverage the substantial resources and private capital of the reinsurance industry. Our CIRT transactions complement the significant credit risk transfer that we continue to execute through our Connecticut Avenue Securities, and help protect U.S taxpayers from credit losses," said Rob Schaefer, VP for credit enhancement strategy & management. "We are pleased that this form of risk transfer has been well received by the market and, based on the indicated support by the reinsurers, we intend to bring similar transactions to the market in the future."
For information on these transactions or on Fannie Mae's approach to credit risk transfer, click here.