Fannie Mae has expanded its risk sharing offerings with Wednesday's announcement of the credit insurance risk transfer (CIRT) deal, which transfers the credit risk on a pool of loans from the taxpayers to a panel of domestic reinsurers.
The goal of CIRT is to reduce the risk to taxpayers by increasing the role of private capital in the mortgage market. The new deal also fulfills one of the 2014 Conservatorship Scorecard goals, which was to complete a variety of risk sharing transactions in addition to the Connecticut Avenue Securities (C-deals) series announced by Fannie Mae in October 2013.
"This unique transaction uses actual losses to calculate benefits, for which risk investors have expressed a preference,” said Andrew Bon Salle, EVP of single-family underwriting, pricing and capital markets at Fannie Mae. "This deal complements our current risk sharing offerings focused on capital markets investors and mortgage insurers, and we expect it will be a template for similar transactions that we may execute in the future. The reinsurance market is an attractive potential source of private capital because it currently bears a small amount of U.S. residential mortgage risk. We are pleased to test new and innovative ways to diversify our risk sharing counterparties and to structure this deal in a manner that promotes efficiency and safety."
In the recently announced transaction, CIRT-2014-1, which went into effect on November 1, 2014, Fannie Mae will retain the risk on the first 50 basis points of loss for a pool of loans that totals $6.419 billion. Should this layer be exhausted, Fannie Mae will be provided actual loss coverage for a term of 10 years for up to approximately $193 million for that $6.419 billion loan pool. The aggregate coverage amount may be reduced at the 3-, 5-, and 7-year anniversaries from the effective date depending on the loan pool's pay down and the amount of covered loans that become seriously delinquent (90 days or more past due).
The loans in the $6.419 pool referenced for this transaction were acquired by Fannie Mae from January to March 2014, and the loans in the pool are 30-year fixed-rate loans with loan-to-value ratios of between 60 and 95 percent. The latest CIRT announced provides supplemental coverage for losses that exceed what is covered by primary mortgage insurance, which already covers loans with an LTV ratio of greater than 80 percent.