Fannie Mae breaks report with new insurance-based threat switch

Fannie Mae has completed a groundbreaking single family transaction as part of its credit insurance risk transfer program that will close its operations in this space for the year.

The government-funded company moved $ 1.2 billion in risk to a mortgage pool with an unpaid capital balance of $ 30.7 billion through the CIRT deal, which was the largest in its category to date. This is ensured by a group of 20 direct insurers and reinsurers.

"CIRT 2021-2 has transferred the largest mortgage credit risk through a single CIRT transaction since the program began in 2014," said Rob Schaefer, vice president of credit enhancement strategy and management at Fannie Mae, in a press release.

In the deal, Fannie takes responsibility for the first 65 basis points of loss on $ 30.7 billion in mortgage loans acquired between April and June of this year. Thereafter, insurers and reinsurers will step in to cover the next 385 basis points of loss up to a maximum of approximately $ 1.18 billion. The mortgages have loan-to-value ratios of over 80%, but not over 97%, and are predominantly 30-year fixed-rate products.

The coverage is based on the actual loan defaults over a period of 12.5 years. Fannie may terminate this coverage at any time after the five year effective date October 1, 2021. After the first anniversary – and depending on certain circumstances related to insured pool repayments and the principal amount of seriously overdue loans – total coverage may be reduced on a monthly basis.

The unusually large single-family CIRT deal comes after a time when Fannie generally retired from credit risk transfer activity following a revision of the GSE capital framework under the Trump administration. The revision called for an amount to be retained for risk transfers that Fannie Mae found unaffordable, especially for structured CRT transactions. Since then, the Biden government has changed this framework again, increasing capital incentives for risk-sharing.

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