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The credit risk transfer programs implemented by Fannie Mae and Freddie Mac in order to transfer a portion of its credit risk on certain Single-Family loans to private capital markets investors and minimize taxpayer risk are relatively new at only two years old.
But the success of programs like the Connecticut Avenue Securities (CAS) Series by Fannie Mae and Structured Agency Credit Risk (STACR) debt note offerings by Freddie Mac have ensured that credit risk transfer is not simply a passing trend, but the way of the future for the GSEs as they look to transfer more credit risk to private investors. Fannie Mae and Freddie Mac, now under conservatorship of the Federal Housing Finance Agency for more than seven years since receiving a $187.5 billion taxpayer-funded bailout in 2008.
“In the past, we acquired credit risk and held it through the life of the asset,” Fannie Mae CEO Timothy Mayopoulos said earlier this month in a public address. “Today, we are not only holding credit risk, but also moving some of that risk away from taxpayers to private capital. Over the past two years, we have developed a substantial new market to share credit risk that has reinvigorated private capital investment in mortgage credit.”
Freddie Mac CEO Donald Layton said earlier this month that credit risk transfer was now part of the Enterprise’s permanent business model.
“Single-family risk transfer was zero a few years ago by comparison,” Layton said. “Now it's a fast-moving field. The instruments we use are growing and evolving. We're also doing this with sound economics. It's very exciting.”
Freddie Mac has laid off a substantial portion of credit risk on more than $330 billion in unpaid principal balance (UPB) for single-family mortgages through the first 15 STACR offerings and 10 Agency Credit Insurance Structure (ACIS) transactions in two years. Fannie Mae has issued $12.44 billion in notes and transferred a portion of the credit risk to private investors on single-family loans with $437.55 billion in outstanding unpaid principal balance through nine CAS transactions since the program began in October 2013.
"The instruments we use are growing and evolving. We're also doing this with sound economics. It's very exciting.”—Donald Layton
Fannie Mae estimates that through all of its risk transfer programs, it will have transferred a portion of credit risk on single-family mortgage loans for approximately half a trillion dollars in UPB by the end of 2015.
“What does this mean for investors?” Faith Schwartz, SVP, Government Affairs with CoreLogic, wrote earlier this month in the company’s MarketPulse. “The credit risk transfer market appears to be here to stay. The GSEs have efforts underway to explore additional avenues of risk sharing, though both the STACR and CAS programs have proven to be effective, attracting over 150 different investors. In a market that has been searching for how to bring back private capital, this appears to be a promising approach.”
Some of the additional risk sharing strategies that the GSEs are exploring for issuance and expansion include credit-linked notes and up-front risk sharing with insurers and re-insurers, according to Schwartz. Either way, she said, “the GSEs and FHFA appear to be working hard to innovate and create solutions designed to minimize taxpayer risk.”
