Fannie to keep tinkering with credit-risk transfer formula

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Fannie Mae continues to experiment with various forms of credit risk transfers to strike a balance between offering a product that's attractive to investors and a cost-effective way to reduce risk.

Fannie Mae has done more than $1 trillion in unpaid principal balance in credit risk transfer transactions from October 2013 through the end of the second quarter of 2017.

"Our goal here is to build a whole suite of risk transfer capabilities, using different sorts of executions, experimenting with that and figuring out what the optimal net of those capabilities are in different market conditions on a going forward basis," Fannie Mae President and CEO Timothy Mayopoulos said in an interview.

"Think about it as having a quiver with a different bunch of arrows in it," he said. "The front-end execution pilots were another arrow we're trying to develop and have in place," with the goal of attracting more private capital to the market.

Fannie Mae's second front-end risk transfer pilot — consisting of mortgages with loan-to-value ratios between 60% and 80% — is designed with capital markets investors in mind, as opposed to private mortgage insurers.

"Part of what we've been doing in these programs is to try and figure out how investors view the risk in these loans and what would the market price be for private capital for taking on some of the risk of those loans," Fannie Mae Chief Financial Officer David Benson said during the interview.

Fannie Mae reported second-quarter net income of $3.2 billion, compared with $2.8 billion in the first quarter and $2.9 billion in the second quarter of 2016.

More than 75% of the $5 billion in net interest income came from guarantee fees; the rest came from its retained mortgage portfolio. For the same period last year, Fannie Mae had $5.3 billion in net interest income.

On the other hand, Fannie Mae had a lower net fair value loss, $700 million, compared with $1.7 billion. The drop in interest rates last June drove the difference.

The single-family guarantee portfolio was $2.9 trillion as of June 30, up from $2.8 trillion one year earlier.

Fannie Mae expects to pay a $3.1 billion dividend to Treasury for the quarter "if the Federal Housing Finance Agency declares a dividend in this amount," Mayopoulos said during Fannie Mae's second-quarter press call. This echoed some of the semantics that Freddie Mac used in its earnings release.

"I'm not aware of any change in policy at FHFA," Mayopoulos said when asked about the wording during the interview. "Director [Mel] Watt will make his decision about this quarter as he does in every quarter as to whether to direct us to make that payment or not. That's FHFA's decision to make."

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