Fannie Mae has completed its first credit insurance risk transfer deal of the year, which covers $26.1 billion in unpaid principal balance of mortgages acquired in the first quarter of 2022.
The transaction highlights why government-sponsored enterprises like Fannie prefer to use a broad range of risk-sharing alternatives. Another vehicle Fannie has used to diversify its strategies, credit risk transfers known as Connecticut Avenue Securities, reportedly delayed issuance late last week due to market turbulence from Russia’s invasion of Ukraine.
Fannie’s regulator, the Federal Housing Finance Agency had sought earlier to impose more restrictive capital rules on CRT deals under the Trump administration, citing concerns about their risk. As a result, Fannie put its CRT program on hold in response until the Biden administration signaled an intent to ease those restrictions last year. And last week, the FHFA formally instituted a rule that will scale back those restrictions, paving the way for a broader range of risk-sharing to be utilized.
Among the goals of risk-sharing with the private sector is protection for taxpayers, who have exposure to government-sponsored enterprises like Fannie, a major mortgage investor. Fannie and fellow GSE Freddie Mac have had ties to the Treasury since they went into government conservatorship during the Great Recession’s housing crash. The Trump administration wanted the GSEs to exit conservatorship, but currently they’re seen as more likely to remain in it, or be reconfigured as utilities.
Through the most recent CIRT deal, Fannie is working with what’s been a stable group of insurance business partners to transfer $770.7 million in risk from a pool of loans that primarily consists of fixed rate mortgages originated with 30-year terms.
“CIRT 2022-1 begins a new, active year of CIRT issuance for Fannie Mae. We appreciate our continued partnership with the 22 insurers and reinsurers that wrote coverage for this deal,” Rob Schaefer, a vice president in Fannie’s capital markets division, said in a press release.
After a $65.3 million retention layer that accounts for the first 25 basis points of loss Fannie Mae will retain is exhausted, those insurers and reinsurers will cover the next 295 basis points, up to maximum coverage of nearly $771 million.
Fannie described the loans in the most recent CIRT deal as underwritten to “rigorous” standards with loan-to-value ratios in the 60 to 80% range. Loan performance may lead to yearly adjustment in coverage. Coverage is based on actual losses over 12.5 years. Fannie can cancel coverage after the transactions’ five-year anniversary for a fee.