Fannie Mae Taps Reinsurance Industry in New Risk Sharing Transaction

Callie Dosberg

202-752-3117

WASHINGTON, DC – Fannie Mae (FNMA/OTC) announced today that it has completed a new credit risk sharing transaction that further diversifies its counterparty exposure and reduces taxpayer risk by increasing the role of private capital in the mortgage market. The credit insurance risk transfer (CIRT^™) deal shifts credit risk on a pool of loans to a panel of domestic reinsurers. The CIRT deal also furthers the 2014 Conservatorship Scorecard goal to complete a variety of credit risk sharing transactions in addition to the company’s Connecticut Avenue Securities (CAS) series.

“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, Pricing and Capital Markets. “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 reinsurance market is an attractive potential source of private capital because it currently bears a small amount of U.S. residential mortgage risk. 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.”

In this transaction, CIRT-2014-1 which became effective November 1, 2014, Fannie Mae retains risk on the first 50 basis points of loss on a $6.419 billion pool of loans. If this layer is exhausted, Fannie Mae is provided actual loss coverage for the next 300 basis points of loss on the $6.419 billion pool, up to a maximum coverage of approximately $193 million. 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 3-year, 5-year and 7-year anniversaries from the effective date.

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

More information on Fannie Mae’s credit risk transfer activities is available at https://www.fanniemae.com/portal/funding-the-market/credit-risk/index.html.