Fannie Mae breaks record with latest insurance-based risk transfer

Fannie Mae has completed a groundbreaking single-family transaction through its Credit Insurance Risk Transfer program that will close out its activity in this area for the year.

The government-sponsored enterprise transferred $1.2 billion in risk on a pool of mortgages with an unpaid principal balance of $30.7 billion through the CIRT deal, which was the biggest in its category to date. A group of 20 insurers and reinsurers are providing coverage for it.

“CIRT 2021-2 transferred the largest amount of mortgage credit risk through a single CIRT transaction since the inception of the program in 2014,” said Rob Schaefer, vice president for credit enhancement strategy and management at Fannie Mae, in a press release.

In the transaction, Fannie takes responsibility for the first 65 basis points of loss on $30.7 billion mortgages acquired between April and June of this year. After that, the insurers and reinsurers will step in to cover the next 385 basis points of loss up to a maximum of approximately $1.18 billion. The mortgages involved have loan-to-value ratios of above 80% but no higher than 97% and are primarily 30-year, fixed-rate products.

The coverage is based on actual loan losses experienced over a period of 12.5 years. Fannie can cancel that coverage any time after the five-year anniversary of the effective date, Oct. 1, 2021. After the first anniversary — and depending on certain circumstances related to insured pool paydowns and principal amount of seriously delinquent loans — reductions in the aggregate coverage amount become possible on a monthly basis.

The unusually large single-family CIRT deal comes after a period in which Fannie generally pulled back from credit risk transfer activity following a revision to the GSE capital framework under the Trump administration. The revision called for an amount of funds to be held against risk transfers that Fannie Mae found prohibitive, particularly for structured CRT deals. The Biden administration has since made another change to that framework, which increased the capital incentives for risk sharing.

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