GSE risk-sharing deals hit $12 billion, with more to come in 2019

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Fannie Mae and Freddie Mac transferred a substantial amount of credit risk to the private sector through both single-family and multifamily market transactions in the first half of the year, with activity expected to rise in 2019, according to the Federal Housing Finance Agency.

The FHFA established a 2018 scorecard objective for Fannie and Freddie to transfer a meaningful portion on at least 90% of the unpaid principal balance of their single-family loan acquisitions targeted for CRT by the end of the year. They transferred 77% of the risk on 85% of the UPB of targeted new single-family acquisitions through the second quarter.

The government-sponsored enterprises transferred risk on about $367 billion of UPB with a risk-in-force of $12 billion; Fannie transferred risk on $179 billion, with a total RIF of $5.9 billion, and Freddie transferred risk on $188 billion of UPB with a total RIF of $6.2 billion, according to an FHFA progress report.

Last year, loans targeted for CRT comprised 65% of single-family loan production.

"As evidenced in this report, through CRT and mortgage insurance, the majority of underlying credit risk on mortgages targeted for CRT has been transferred to private investors," said FHFA Director Mel Watt in a press release.

"The amount of credit risk transferred should continue to increase as the enterprises continue to innovate and experiment with different structures and attempt to expand the scope of their CRT programs to further reduce risk where economically sensible," he said.

Regarding single-family CRT activity, debt issuances accounted for 61% of RIF, reinsurance transactions accounted for 30%, lender risk sharing accounted for 6% and senior/subordinate transactions accounted for 3% of RIF.

The GSEs transferred a portion of credit risk on about $2.5 trillion in single-family loans through CRT from 2013 through the first half of this year. During that same time, $1.1 trillion in credit risk has also been transferred to primary mortgage insurers.

The FHFA established single-family credit risk sharing guidelines for the GSEs back in 2012, and Fannie and Freddie began implementing CRT programs the following year.

For multifamily credit risk through CRTs, Fannie and Freddie transferred 28% and 86%, respectively, in the first half of the year.

While the primary purpose of the CRT programs is to minimize risk and protect taxpayers, there's an interesting connection between the transfer activity and the potential privatization of the GSEs. The private sector and Fannie and Freddie become more closely tied as the GSEs sell off more risk to investors, and the success of this model may influence the direction of housing finance reforms in the future.

The CRT program progress update comes after Fannie Mae launched its first transaction offloading credit risk on mortgages it insures using a real estate mortgage investment conduit on Monday.

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Credit risk transfers GSEs PMI Secondary market Risk management Fannie Mae Freddie Mac FHFA