Fannie Mae transfers another $926 million in mortgage credit risk

A government-related agency that backs a significant portion of the U.S. mortgage market has shared nearly $1 billion in credit risk with the private sector through two transactions.

One of the two Fannie Mae credit insurance risk transfer deals involved, CIRT 2023-2, is related to one pool of single-family mortgages acquired between February and March that has loan-to-value ratios between 60.01% and 80%. The other, CIRT 2023-3, has a cover pool of single-family loans with LTVs ranging from 80.01% to 97%. Fannie acquired those mortgages between January and March.

In total, around 98,000 loans with a principal balance of $31.8 billion are in the two cover pools. CIRT 2023-2's cover pool has about 44,000 in loans with a principal balance of $13.8 billion. CIRT 2023-3's cover pool has roughly 54,000 mortgages with a principal balance of roughly $18 billion.

On CIRT 2023-2, Fannie has agreed to absorb the first 95 basis points of loss up to $131 million. A group of 19 reinsurers has agreed to covering the next 365 basis points up to a maximum of $503.5 million.

"We appreciate our continued partnership with the 20 insurers and reinsurers that have committed to write coverage for these deals," said Rob Schaefer, vice president, capital markets, in a press release.

The government-sponsored enterprise retains risk on the first 100 basis points of loss for CIRT 2023-3 up to $179.8 million. A group of 18 reinsurers will cover the next 235 basis points for a maximum of $422.5 million.

Generally the coverage is based on actual losses for 12.5 years. However, coverage can be reduced after a year and each month thereafter depending on the extent to which loans in insured pools pay down or become seriously delinquent. Fannie can opt to pay a fee to cancel coverage after five years.

While Fannie Mae has forecast there'll be a recession in the second half of 2023, delinquencies have remained historically low to date. In its most recent monthly report, reflecting February activity, its serious delinquency rate was 0.62% down from 0.64% in January and 1.11% a year earlier.

Fannie shares risk through both CIRTs and structured credit-risk transfers. It reportedly delayed a CRT deal earlier this month due to an uptick in market volatility linked to recent bank failures. It did price two CRT other deals under its Connecticut Avenue Securities program earlier this year.

Fannie Mae and its competitor, Freddie Mac, utilize multiple types of risk-sharing strategies in part so that if there is disruption affecting one of them, they can shift to a different approach.

In total, Fannie has acquired around $23.5 billion in insurance coverage on $793 billion in single-family loans through credit insurance risk transfers.