Fannie Mae's 1st Actual Loss Deal Is With Reinsurers

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Fannie Mae has completed a credit risk-sharing transaction that transfers the actual losses on mortgages it insures — to reinsurers.

In this transaction, CIRT-2015-3 which became effective Aug. 1, Fannie Mae retains risk for the first 50 basis points of loss on a $7 billion pool of loans. If this $35.2 million retention layer were exhausted, reinsurers would cover the next 250 basis points of loss on the pool, up to a maximum coverage of approximately $176.2 million.

Coverage is provided based upon actual losses for a term of 10 years. Depending upon the pay down of the insured pool and the amount of insured loans that become seriously delinquent, the aggregate coverage amount may be reduced at the three-year anniversary and each anniversary of the effective date thereafter. The coverage may be canceled by Fannie Mae at any time after the five-year anniversary of the effective date by paying a cancellation fee.

The reference loan pool for the transaction consists of 30-year fixed rate loans with loan-to-value ratios of between 60% and 80%. The loans were acquired by Fannie Mae from September through December of 2014.

For the second time since the program's inception in 2014, an international reinsurer participated in this type of Fannie Mae risk-sharing transaction.

Fannie Mae's primary risk-sharing program, Connecticut Avenue Securities, transfers risk to capital markets investors, rather than insurers. To date, these transactions have offered exposure to losses as calculated by applying a fixed rate of severity to loans when they become 180 days delinquent. However, future CAS deals will offer exposure to actual losses, something that rival Freddie Mac already offers.

This month, Fannie Mae released an enhanced set of data on the performance of the single-family loans that it insures, including information on property disposition.

Freddie Mac began making loan-level loss data available to investors in November.

Through both CIRT and CAS, Fannie Mae has sold a portion of the credit risk on approximately 60% of recent acquisitions and on approximately $419 billion of loans in recent years.

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