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Fannie Mae completes risk-sharing deal with reinsurance industry


Fannie Mae took another step forward in helping to shield taxpayers from future risk by completing a transaction involving a panel of private reinsurers that will provide credit-risk coverage for a $4.68 billion pool of mortgage loans.

As part of the transaction, Fannie — a government-sponsored enterprise that purchases, guarantees and securitizes mortgages — will retain the risk for a portion of the loan pool, a layer up to $23.4 million. Losses above that cap would be covered by reinsurers up to a maximum of $117 million.

The deal, dubbed CIRT-2015-1, provides coverage based on actual losses for a 10-year term. Coverage amounts can be adjusted over the course of the pact depending on the performance of the loan pool. Fannie Mae also can terminate the coverage after five years upon paying a cancellation fee.

Fannie completed a similar CIRT transaction last year (CIRT-2014-1) involving a $6.4 billion pool of loans.

The 30-year, fixed-rate loans that are part of this current transaction were acquired by Fannie Mae in the fall of 2013 and have loan-to-value ratios that exceed 60 percent but are less than or equal to 80 percent.

“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,” Rob Schaefer, vice president for credit-enhancement strategy and management for Fannie Mae said in a statement. “Our CIRT [Credit Insurance Risk Transfer] transactions complement the significant credit-risk transfer [CRT] that we continue to execute through our Connecticut Avenue Securities, and help protect U.S taxpayers from credit losses.”

The Connecticut Avenue Securities are designed to share credit risk on a pool of Fannie’s strongest-performing single-family mortgages. The initial credit-linked debt offering in the series was priced in the fall of 2013.

Eknath Belbase, director of MBS strategy for Andrew Davidson & Co, an international financial research and analytics company, says a CRT debt deal, such as the Connecticut Avenue Securities transaction, offers more potential for moving risk from Fannie Mae than does the recent CIRT-2015-1 transaction involving reinsurers.

“The reason the CRT deals have more potential is that almost any institution can participate, not just reinsurers,” said Belbase, who specializes in risk management, credit analytics and risk-based capital. “The reason the private sector would want to participate [in these deals] is that if you can analyze the underlying loans and buy the right pieces of the risk, it can be very profitable. This promises to be a very interesting and growing asset class over the next several years.”

Belbase added that in the recently completed CIRT-2015-1 deal, the risk mitigation is limited because “Fannie takes the first 50 basis points of loss, which are probably all the losses these loans would take in many scenarios.”

"Also, if things get very, very bad, the insurers would pay up, but not all the potential losses,” he added. “Fannie could potentially lose more than the covered amount.”

In the wake of the 2008 subprime mortgage crisis, Fannie Mae was seized by the federal government and put into conservatorship, and it has been overseen by the Federal Housing Finance Agency (FHFA). The recently completed CIRT transaction is designed to insulate taxpayers by “increasing the role of private capital in the mortgage market through the execution of credit-risk transfers,” Fannie Mae said in statement today announcing the deal. 

“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,” Fannie Mae’s Schaefer said in the statement.

For more information, contact Bill Conroy at news@scotsmanguide.com or (425) 984-6019.


 

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