Fannie Mae completed its second credit risk sharing transaction as part of its efforts to diversify counterparty exposure and reduce taxpayer risk.
The Credit Insurance Risk Transfer transaction, as the government-sponsored enterprise referred to it, shifted the credit risk on a pool of loans to a group of reinsurers. Consequently, the deal helps Fannie Mae meet its goals per the 2015 Federal Housing Finance Agency Conservatorship Scorecard to increase the role of private capital in the mortgage market.
The transaction became effective June 1. Fannie Mae retains the risk for the first 50 basis points of loss on a $4.68 billion pool of loans, meaning that if this loss were exhausted then reinsurers would cover the next 250 basis points up to a maximum of $117 million in coverage.
The coverage is based on a 10-year term of losses. Depending on the health of the pool of loans, the coverage amount can be reduced at the three-year mark and each year thereafter. Fannie Mae can also cancel the coverage any time after the five-year mark by paying a cancellation fee.
"This transaction represents a continuation of Fannie Mae's efforts to develop innovative ways to transfer risk to the market and leverage the substantial resources and private capital of the reinsurance industry," said Rob Schaefer, vice president for credit enhancement strategy and management, in a July 14 news release announcing the transaction.
"Our CIRT transactions complement the significant credit risk transfer that we continue to execute through our Connecticut Avenue Securities, and help protect U.S taxpayers from credit losses."
