Fannie Mae calls on reinsurers in risk-sharing deal

Fannie Mae has expanded its risk sharing offerings with the announcement of a deal, which transfers the credit risk on a pool of loans.

Fannie Mae has expanded its risk sharing offerings with the announcement of the credit insurance risk transfer (CIRT) deal, which shifts credit risk from the taxpayers to a panel of domestic reinsurers.

The mortgage giant purchased insurance to cover a portion of losses on $6.4 billion of home loans in the mortgage giant’s latest effort to share risks with private investors. The policy will cover as much as $193 million of losses on a pool of mortgages with a group of domestic reinsurers taking on that risk.

“This unique transaction uses actual losses to calculate benefits, for which risk investors have expressed a preference,” said Andrew Bon Salle, executive vice president, single-family underwriting at Fannie Mae. “This deal complements our current risk sharing offerings focused on capital markets investors and mortgage insurers, and we expect it will be a template for similar transactions that we may execute in the future.”

The coverage term is 10 years. Depending upon the pay down of the pool and the amount of covered loans that may become seriously delinquent, the aggregate coverage amount may be reduced at the three-year, five-year and seven-year anniversaries from the effective date of Nov. 1, 2014.

The reference loan pool for the transaction consists of 30-year fixed rate loans with loan-to-value (LTV) ratios between 60 and 95%. The loans were acquired by Fannie Mae from January through March of 2014. Loans over 80% LTV are already covered by primary mortgage insurance, and the credit risk transfer provides supplemental coverage for losses that exceed that covered by primary mortgage insurance.

“The reinsurance market is an attractive potential source of private capital because it currently bears a small amount of U.S. residential mortgage risk,” said Bon Salle. “We are pleased to test new and innovative ways to diversify our risk sharing counterparties and to structure this deal in a manner that promotes efficiency and safety.”