[1]While the FHFA [2]’s conservatorships of Fannie Mae [3] and Freddie Mac [4] are unlikely to end before 2017, the Enterprises continue to transfer more credit risk from their single-family residential mortgages to private insurers.
Fannie Mae’s credit risk transfer program, Connecticut Avenue Securities (CAS) [5], has sold more than $12.4 billion in securities to private investors, which covers $438 billion worth of mortgage loans since the program’s inception in September 2013. Fannie Mae estimates by the end of 2015, it will have transferred a portion of the credit risk on approximately half a trillion dollars worth of single-family mortgages.
“We recently brought our ninth CAS deal [6] to the market, our first CAS deal allocating actual losses from the deal's reference pool to investors (versus a fixed severity schedule incorporated on previous deals),” said Laurel Davis, Fannie Mae’s VP of Credit Risk Transfer, in a commentary on Wednesday [7]. “We will continue to use the actual loss framework for CAS deals going forward and provided enhanced disclosures to support this shift.”
Through the CAS series and other forms of credit risk transfer such as the Credit Insurance Risk Transfer (CIRT) program, insurance/reinsurance deals, senior-subordinate securities, and collateralized recourse transactions, Fannie Mae has been able to move credit risk away from taxpayers to private capital—as opposed to the past model of acquiring credit risk and holding it through the life of the asset.
“Credit risk transfer is now a regular part of the Enterprises’ business.”
FHFA
“Our credit risk-sharing transactions are structured so that if the covered loans experienced the same stress scenario as in the most recent housing crisis, Fannie Mae's projected loss exposure would be limited to a relatively small piece of credit risk retained by the company,” Davis said. “Our efforts to transfer credit risk away from Fannie Mae significantly reduce taxpayers' exposure to risk, give investors an avenue to gain exposure to the U.S. housing market, and help ensure essential funding for homebuyers.”
Both GSEs have exceeded their credit-risk transfer goals for the calendar year 2015, largely due to Fannie Mae’s CAS series and Freddie Mac’s Structured Agency Credit Risk (STACR) series. Fannie Mae has transferred credit risk on $205 billion in single-family mortgages year-to-date as of October 2015 (the goal was $150 billion), and Freddie Mac has transferred credit risk on $126 billion in single-family mortgages for that same period (the goal was $120 billion).
“Credit risk transfer is now a regular part of the Enterprises’ business,” the FHFA wrote in its Performance and Accountability Report for FY 2015 [8] released earlier this week. “In all credit risk transfers, the Enterprises and FHFA have been strategic about which loans to target. Instead of using a random sample of Enterprise loans, the transactions focus on new loan purchases with the greatest credit risk. The targeted loans include new acquisitions of 30-year fixed-rate mortgages that have loan-to-value ratios exceeding 60 percent, excluding HARP (Home Affordable Refinance Program) refinances. The Enterprises are currently transferring significant credit risk on approximately 90 percent of these targeted loans, the mainstay of their single-family purchases. This approach has made the transactions easier to scale up and more economical, benefitting the Enterprises and taxpayers.”