Third upsized Freddie Mac deal confirms CRT demand is back on track

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A string of upsized Freddie Mac single-family credit-risk transfer deals seen this summer suggests investor interest in them has become consistent again after faltering in the early days of the pandemic.

On Tuesday, Freddie Mac closed a Structured Agency Credit Risk transaction called STACR 2020-DNA4, which was the third in a series of transactions it's had to upsize since March to meet demand.

Specifically, Freddie increased the B-1 tranche — which was originally expected to be $250 million — by another $50 million. That brought its total size to $300 million.

"The market showed itself to be fairly resilient and ready to absorb new issuance much faster than any of us expected," Mike Reynolds, a vice president at Freddie, said in an interview last month, when issuance first resumed.

Whether or not the government-sponsored enterprises would continue to make use of structured credit risk transfers has been an open question, given the coronavirus-related market disruption, and how CRT are treated under reproposed GSE capital rules.

The Federal Housing Finance Agency, which is the GSEs' regulator and conservator, until this year has encouraged the use of structured CRT as one of the means of protecting taxpayers by sharing risk with the private sector.

However, things changed last year when the FHFA released its 2020 scorecard, in which the FHFA called for the GSEs to conduct a "comprehensive review" of the CRT program under its direction, noting that the review would include a cost-benefit analysis.

The FHFA's reproposed capital rule, which would make CRT less attractive to the GSEs if finalized, is still pending. The FHFA is accepting comments on the rule through the end of the month.

The GSEs' use of risk-sharing vehicles like structured CRTs dates back to the Obama administration, and over the years Freddie and Fannie's involvement in the market has grown considerably.

In 2019, Fannie transferred $488 billion in risk from reference pools of mortgages through CRT, and Freddie Mac transferred $220 billion, according to the FHFA.

Reynolds would like to see Freddie Mac continue to issue CRT deals given all the investment it has put into them since 2013.

"We worked to cultivate this CRT market," said Reynolds. "We place a lot of value on being a consistent issuer."

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Credit risk transfers Freddie Mac GSEs FHFA Fannie Mae