Partnering with sellers and servicers to manage credit risk
Fannie Mae complements its primary credit risk sharing programs — Connecticut Avenue Securities™ (CAS) and Credit Insurance Risk Transfer™ (CIRT™) — by entering into risk sharing arrangements directly with our Seller/Servicers. We refer to these transactions as Seller/Servicer Risk Share arrangements. These transactions are performed on a more limited scale than our primary risk sharing vehicles, and are specifically designed for those Seller/Servicers that have the ability and desire to retain a portion of the credit risk on the loans they sell us.
These transactions are structured to:
- Align incentives between Fannie Mae, Seller/Servicers, and MBS investors;
- Reduce taxpayer risk;
- Mitigate counterparty risk; and
- Produce returns in support of Fannie Mae's overall credit risk transfer objectives.
Seller/Servicer Risk Share arrangements complement our CAS and CIRT programs
Our Seller/Servicer Risk Share arrangements are an attractive option for certain Seller/Servicers that wish to retain credit risk. For the loans we acquire from the vast majority of our Seller/Servicers, our CAS and CIRT programs will remain the primary means by which we share mortgage credit risk with investors. Through our flagship CAS program and our companion CIRT insurance risk share program, Fannie Mae acts as an intermediary between Seller/Servicers and credit investors by utilizing the most innovative credit risk management technology and expertise available in the market for mortgage credit risk. Our large scale aggregation capabilities, operational infrastructure and robust strategy have produced increasing levels of liquidity and scalability that continue to provide tremendous value to investors and Seller/Servicers.
Seller/Servicer Risk Share arrangements typically involve collateralized recourse structures, which generally follow these basic mechanics:
- Eligible Seller/Servicers establish Special Purpose Entities (SPEs) to deliver a pool of mortgages to Fannie Mae for direct purchase or securitization into MBS.
- A collateralized recourse arrangement is established to cover credit losses with respect to such mortgage loans.
- A collateral account is funded by the Seller/Servicers.
Currently, we offer non-certificated collateralized recourse structures.
|1. Traditional loss participation agreement|
|2. Structured to transfer risk either by allowing the investor to take first loss or Fannie Mae to take first loss, depending on market conditions and CRT objectives.|
|3. Actual Loss risk transferred. Losses charged once expenses and proceeds are recognized, post-property disposition.|
|4. Fixed premium paid monthly based on outstanding balance of the reference pool|
|5. Minimum deal size: N/A|
Non-certificated collateralized recourse:
First or second loss share agreement in exchange for risk-share payment
Requirements for Seller/Servicer Risk Sharing partners
Not all Seller/Servicers are eligible to participate in Seller/Servicer Risk Share arrangements. Seller/Servicers must be in good standing with Fannie Mae, have the ability to invest capital to provide credit-risk protection, and demonstrate the ability to manage the origination and servicing of loans consistent with Fannie Mae standards.
Also, not all loans are eligible for Seller/Servicer Risk Share arrangements. The eligible loan profile for Seller/Servicer Risk Share arrangements is similar to the eligible loan profile for other Fannie Mae credit risk sharing programs. Typically, loan characteristics will include:
- Newly originated 25- and 30-year fixed-rate mortgages
- Loan-to-value ratios greater than 60% and less than or equal to 97%
- Refi Plus and DU Refi Plus loans are not eligible
If you are interested in learning more about Fannie Mae's Seller/Servicer Risk Share arrangements, please contact your Customer Delivery Team.