The new agreement is part of a growing programme to transfer home mortgage loan risk to the private market to help de-risk lenders and homeowners
The US Federal National Mortgage Association, known commonly as Fannie Mae, has transferred $1.7bn worth of home mortgage loan risk to insurers in the country’s private market.
Although Fannie Mae has a history of risk-sharing with insurers on single-family mortgages – loans on properties made to accommodate one family, rather than the commercial equivalent for buildings with multiple occupants – this is the first time a transaction through its Credit Insurance Risk Transfer (CIRT) programme has been comprised of affordable housing loans.
The Housing Finance Agencies (HFAs) that bring business to Fannie Mae will still carry some of the credit risk, but the majority will be held by a panel of eight insurance and reinsurance partners.
Rob Schaefer, vice-president of credit enhancement strategy and management at Fannie Mae, said: “This deal pioneered new ground as our first CIRT transaction to cover a targeted pool of single-family affordable loans.
“We extend our deep appreciation for the insurer and reinsurer partners that work with us on unique deals such as this, along with our HFA and lender partners that originate and deliver these loans to Fannie Mae.
“Together, they help us serve our affordable housing mission that is at the heart of Fannie Mae’s business.”
The insurers have committed to take on a portfolio of risk from Fannie Mae mostly comprised of home loan mortgages on single-family properties awarded between July 2019 and June 2020, but with a small portion also made in the January 2018 to August 2018 period.
“As this deal demonstrates, we continue to diversify our CIRT offerings, and are proud to be a leader in building and supporting the market for transferring single-family mortgage credit risk to private sources of capital,” Mr Schaefer added.
How does Fannie Mae break down the mortgage risk for home mortgage loan pool?
The HFAs that serve as mortgage loan originators will continue to cover their lender purchase obligation – an agreement to buy back any home loan that doesn’t fit Fannie Mae’s official requirements.
Any risk beyond this point will be shared between the government-sponsored enterprise itself and the eight private insurers and reinsurers taking it on in the CIRT agreement.
Fannie Mae’s role in the US housing market is to purchase mortgage risk, package it into a collateralised debt obligation bond known as a security, and sell shares in it to investors, in order to maintain a cash flow and purchase more debt.
These securities are generally backed by an Excess of Loss (XOL) reinsurance agreement, which allows Fannie Mae to make a claim after paying a continuous premium on its policy – like a regular insurance agreement.
The CIRT programme allows a group of private insurers to take on some of this insurance risk in return for a share of the premium, which they then cede a proportion of to reinsurers who cover their own risk – creating a more diversified structure of risk transfer.
The benefit of this structure, for Fannie Mae, is that insurers and reinsurers outside of the housing market, the majority of which have several alternative income streams, are at less risk of catastrophic events like the 2008 financial crash.
This ultimately leaves mortgage payers and owners more protected against changes to the housing market and the wider economy.
In the new CIRT deal centred on affordable single-family mortgages, Fannie Mae will retain the risk for the first 2.5% of losses made on the security, up to a limit of $43m.
Once this amount, known as the retention layer, is exhausted, the eight insurers and reinsurers receiving ceded premiums will cover the next 8.8% – up to a maximum coverage of about $154m.