Fannie Mae doubles down on credit risk insurance transfers

Fannie Mae announced on Tuesday that it has executed two transfers of credit risk insurance associated with mortgages acquired in the second and third quarters of 2021, respectively.

The latest two transactions come on the heels of the government-sponsored venture first deal of the year and publication of a finalized capital rule aimed at facilitating broader risk sharing.

In Fannie’s second deal, CIRT 2022-2, it retained 25 basis points of loss on a $26.5 billion covered loan pool of 87,400 mortgages. If the retention layer is depleted, 22 insurers and reinsurers will cover the next 335 basis points of loss in the pool, up to a maximum coverage of $889 million. The hedged portfolio consists mainly of mortgage loans with loan-to-value ratios of 60% to 80%.

For the third transaction, 2022-3, Fannie retained the first 67 basis points of loss on a $23.3 billion covered loan pool of 76,600 mortgages. If the retention layer is exhausted, 23 insurers and reinsurers will cover the next 385 basis points of loss, up to a maximum coverage of $898 million. The covered pool includes mortgages with an LTV greater than 80% but less than 97%.

As is generally the case, the performance of the loans may lead to an annual adjustment of the cover. Coverage is based on actual losses over 12.5 years. Fannie may cancel coverage after the fifth anniversary of transactions for a fee.

“We appreciate our continued partnership with the 25 insurers and reinsurers who have committed to underwrite coverage for these two agreements,” Rob Schaefer, vice president of capital markets at Fannie Mae, said in a press release.

Fannie has also issued at least two Connecticut Avenue Securities transactions this year, an alternative form of risk sharing that a recently finalized capital rule was designed to make it easy. However, recent market volatility related to Ukraine would have delayed one of these transactions last month.

The circumstance highlights why the availability of multiple types of risk-sharing vehicles has value for government-sponsored companies.

“It could reasonably be expected that different points in the cycle would be more attractive for some executions than others,” Ed DeMarco, chairman of the Housing Policy Council and former GSE regulator, said in an interview.

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