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Freddie Mac Guards Against $285M of Losses with Insurance

JUL 2, 2014 4:57pm ET
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Freddie Mac bought insurance to cover as much as $285 million of losses on a pool of U.S. home loans, in its third and largest such purchase under a risk-sharing effort encouraged by its regulator.

The taxpayer-backed mortgage giant obtained the policies, tied to loans it bought or guaranteed in the second quarter of 2013, from a group of insurers and reinsurers, Freddie Mac said today in an e-mailed statement.

"We've been gaining quite a bit of traction in the market," Jeff Shue, a director working on the deals, said today in a telephone interview. "We've got some new players involved in this transaction, and they've indicated interest in participating on a consistent basis. We feel confident we will see them again."

Shue said the McLean, Va.-based firm won't disclose the names of the four companies "to be consistent with the standards in the market." Competitor Fannie Mae, which is also operating under U.S. conservatorship, announced a similar insurance deal in October.

Freddie Mac has cut its exposure to losses on more than $100 billion of mortgages in the last year through sales of risk-sharing bonds and new insurance policies obtained from companies including Arch Capital Group Ltd.

The latest policies shift more of the risk from the same pool of single-family loans that Freddie Mac referenced with risk-sharing bonds sold in February, Shue said. The mortgages themselves are packaged into other securities that the company guarantees.

Freddie Mac and Fannie Mae are transferring more of their risk to the private market, a model envisioned by legislation sought this year by the leaders of the Senate’s banking committee. Federal Housing Finance Agency Director Mel Watt said in May he would seek such risk-sharing transactions to keep "taxpayers from bearing all of the potential losses" as the companies back about 60 percent of new home loans.

The loans referenced by the $1.8 billion of risk-sharing bonds sold by Fannie Mae and Freddie Mac last year and $4.3 billion placed this year have experienced minimal delinquencies, reflecting their “better credit attributes than historical averages,” Fitch Ratings said yesterday in a report. Only 0.17% are currently delinquent, the rating firm said.

Freddie Mac and Fannie Mae already rely on mortgage insurers to bear losses on loans with less than 20 percent down payments. Fannie Mae in May sold the first risk-sharing securities tied to such mortgages to obtain further protection.

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