Fannie Mae offers diversification as it tweaks latest risk transfer to reinsurers

Fannie Mae, the US government-backed financial institution that provides liquidity to the US mortgage markets by buying mortgages from lenders, has transferred another chunk of risk to the reinsurance markets – this time with different parameters to previous deals offering reinsurers diversification.

Fannie Mae has obtained reinsurance coverage on $11.7 billion of residential mortgages through its 10th Credit Insurance Risk Transfer transaction of 2016. The deal is just its latest as part of an ongoing effort to reduce taxpayer risk by increasing the role of private capital in the mortgage markets.

So far, a combination of Fannie Mae and Freddie Mac, which fulfils a similar role to Fannie Mae, has transferred as much as $40 billion of risk into the private sector including the capital markets. Fannie Mae has acquired more than $3 billion of insurance coverage on over $124 billion of loans through the CIRT programme.

For the approximately 30 re/insurers that write this business at present, it represents a much-needed source of growth and diversification.

This latest deal is unusual, however. For the first time since the programme’s inception, the covered loan pool consists of 15-year and 20-year fixed rate mortgages – a shorter duration that the 30-year mortgages previously insured – offering reinsurers a more diversified investment opportunity.

“With CIRT 2016-9, we identified a new segment of loans for which risk sharing was economical and that proved attractive to our risk-sharing reinsurer partners,” said Rob Schaefer, vice president for credit enhancement strategy & management, Fannie Mae.

“By including 15-year and 20-year loans in the transaction, Fannie Mae has expanded the scope of our credit risk transfer programs that help shift risk away from the company, reduce taxpayer risk, and help create a safer, stronger housing finance system.”

In CIRT-2016-9, which became effective October 1, 2016, Fannie Mae retains risk for the first 35 basis points of loss on an $11.7 billion pool of loans. If this $41 million retention layer were exhausted, reinsurers would cover the next 175 basis points of loss on the pool, up to a maximum coverage of approximately $205 million.

Coverage for these deals is provided based upon actual losses for a term of 7.5 years. Depending upon the pay-down of the insured pool and the principal amount of insured loans that become seriously delinquent, the aggregate coverage amount may be reduced at the two-year anniversary and each anniversary of the effective date thereafter.

The coverage may be cancelled by Fannie Mae at any time on or after the four-year anniversary of the effective date by paying a cancellation fee.