Fannie Mae seeks more reinsurers as it innovates on risk transfer

Fannie Mae, the US government-backed financial institution that provides liquidity to the US mortgage markets by buying mortgages from lenders, is urging more reinsurers to consider participating on its risk transfer programme as it looks to further innovate in terms of the types of risk it is passing on.

Rob Schaefer, vice president for credit enhancement strategy & management, Fannie Mae, told APCIA Today that working with reinsurers represented a good synergy for both parties but he acknowledged that taking on mortgage risk for the first time does require a period of education for reinsurers.

“We have evolved from being a pure holder of risk to an issuer of risk, but we always keep skin in the game. We are a monoline - we only acquire mortgage credit risk.

“As such, diversified insurers and investors may be more capital-efficient holders of mortgage credit, because they can leverage capital they hold from other non-correlated lines of business.

“For reinsurers that work with us, our mortgage credit business offers great diversification within their wider portfolios,” Schaefer said.

Since doing its first Credit Insurance Risk Transfer transaction, Fannie Mae has completed 42 deals, transferring about $10 billion of limit into the reinsurance markets, covering some $375 billion of loans. It has worked with about 40 reinsurers in that time and continues to innovate, transferring new types of risk.

Schaefer said that while the original deals covered only traditional 30-year fixed-rate loans, subsequent deals have expanded beyond this to cover 15- and 20-year loans and, more recently, affordable loans that it has acquired from some of the Housing Finance Agencies, delivered with a 12-month lender repurchase obligation.

These relate to loans which it has already acquired and those which it plans to acquire in the future, known as front-end, or forward, deals.

It has also started transferring the risk relating to multi-family loans, including two deals it has completed this year that transferred some $680 million of limit.

“As reinsurers have become more knowledgeable about mortgage risk, their appetite has grown and we have been able to expand our risk transfer programme,” Schaefer said.

“More tools designed to analyse mortgage risk are available now. We have developed a free web-based tool, called Data Dynamics, to do the same.”

As Fannie Mae’s portfolio has expanded and more reinsurers have become involved, Schaefer said that it has benefited from better pricing from reinsurers, but that the rate has moved based on the profile of the business it is transferring, which has changed over time.

“Rates have gone down, but they have also increased depending on the profile,” he said.
Schaefer would like to work with more reinsurers. He said there is growing interest, with a number of reinsurers making investments in understanding the business and gearing up to make it part of their portfolios.

“There are also companies that have bad memories of the last financial crisis, and prefer not to get involved,” he said. “The big thing for those that are involved is the lack of correlation with other risks they are taking on.”

The Trump administration and the housing agencies’ regulator have suggested they want to reform Fannie Mae’s capital structure by introducing more private capital. Schaefer stresses that it is impossible to second-guess what will be required but confirms that Fannie Mae sees reinsurance and its risk transfer strategy as a key component of its capital structure going forward.