Five reinsurers back Freddie Mac on latest risk transfer innovation

Freddie Mac, the US government-sponsored enterprise that provides liquidity to the US mortgage markets by buying mortgages from lenders, transferred a new type of risk into the reinsurance markets as part of an ongoing expansion of its risk transfer programme.

The body has expanded its multifamily credit risk transfer offerings with the creation of a Multifamily Credit Insurance Pool (MCIP) offering and the closing of the first transaction under that offering.

In MCIP transactions, Freddie Mac enters into long-term credit insurance contracts covering credit losses from existing multifamily loans in the company’s portfolio or bonds that Freddie Mac fully guarantees. The structure transfers a percentage of credit risk to reinsurers, helping reduce Freddie Mac’s need to hold capital for the underlying loans in the pool.

Freddie Mac also announced its first transaction through the offering, MCIP 2018-1. Partnering with reinsurance broker Aon, Freddie Mac has purchased credit risk insurance for the first 5 percent of credit losses on a reference pool of $915 million, which consists of 55 loans in Freddie Mac’s Bond Credit Enhancement and Multifamily Participation Certificate program portfolios.

The average loan balance in the pool is $16.6 million, and most of the 55 properties in the pool include rent-restricted units that are affordable to low- and very low-income families, helping to fulfill Freddie Mac’s affordability mission. There is a total of five reinsurers participating in this transaction.

“This transaction is the first of many we hope to bring forward through the Multifamily Credit Insurance Pool initiative,” said Robert Koontz, senior vice president of Multifamily Capital Markets. “This is yet another great credit risk transfer offering that complements and completes our existing suites of capital market executions. We have successfully delivered similar reinsurance offerings through our single-family business, and now we’re finding similar efficiencies on the Multifamily side.”

The move represents the latest expansion of Freddie Mac’s use of the reinsurance markets to better manage its risks. Its credit risk transfer programme was first conceived in 2013—at that time a completely new asset class for reinsurers. In the aftermath of the financial crisis, the programme took the strategic decision to provide liquidity and stability to the mortgage market by structuring its mortgage credit risk into securities and insurance offerings, thereby transferring credit risk exposure from US taxpayers to private investors. It turned to the capital markets and reinsurance sector to achieve this.

Freddie Mac has since transferred credit risk on more than $1 trillion worth of single-family mortgages with over $38 billion of securities issued and insurance coverage placed in the past five years.

In October, it said it wants to increase the panel of reinsurers it works with over time to as many as 50—a move intended to ensure its credit risk transfer programme will remain stable and sustainable in the long term. It works with around 30 now.

In addition to the risk transfer programme’s steady growth in transactions and investors, Freddie Mac has looked to innovate in the types of risk it has transferred. This latest move represents the latest incarnation of that strategy.

“This offering introduces a new form of credit risk transfer on Freddie Mac’s Multifamily loans,” said Victor Pa, vice president of Investments & Advisory for Freddie Mac Multifamily.

“Through long-term insurance contracts we can help alleviate pricing volatility and reduce execution uncertainties, allowing us to broaden our production capabilities on various types of loans that may be structurally more complicated or need longer time to aggregate. The bottom line is that we will be able to better manage risk and provide more liquidity for affordable rental housing, helping fulfill our mission.”