A $922 million transaction of Fannie Mae's [1] Connecticut Avenue Securities (CAS) deal has marked an innovation by the government-sponsored enterprise (GSE) in its credit risk transfer (CRT) program. Fannie Mae said that this was the first benchmark CRT transaction that utilized a real estate mortgage investment conduit (REMIC) structure. The CAS program is Fannie Mae's benchmark issuance program designed to share credit risk on its single-family conventional guaranty book of business.
"With this milestone offering, Fannie Mae has enhanced the CAS program in a way that makes it more attractive to a broader range of investors over the long run," said Laurel Davis, VP for Credit Risk Transfer, Fannie Mae. "It marks our latest and the most substantial innovation in five years of progress to reduce risks to U.S. taxpayers in the secondary mortgage market and deepen the sources of sustainable liquidity for U.S. mortgage lenders. We expect to return to the market with this new structure in early 2019."
Fannie Mae has said that going forward all their CAS offerings would be issued as CAS REMICs. The election of a REMIC structure would result in Fannie Mae being able to issue its CAS notes as REMIC securities. "This enables large and vibrant real estate investment trust (REIT) market and international investors to expand their participation in the CAS program," Davis wrote on the GSE's blog [2].
According to Davis, investor benefits of this structure included removal of tax withholding restrictions for non-U.S. investors in all tranches; CAS REMIC notes satisfied all REIT income and asset tests for tax purposes; insulation for investors from potential future counterparty risk exposure to Fannie Mae; and simplified and aligned tax treatment of CAS with other mortgage-related securities.
Additionally, under the new CAS REMIC structure, Fannie Mae will be able to recognize the benefit of the credit protection provided by the CAS REMIC notes at the same time it recognizes the loss on the loan for accounting purposes. "Whereas with CAS debt notes, there can be a significant lag between the time when we recognize a loss on the loan and when we recognize the related recovery from the CAS transaction," Davis said.