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Investors Remain Bullish on GSEs’ Credit Risk Transfer Program

Fannie Mae and Freddie Mac (the GSEs) together transferred risk on $689 billion of unpaid principal balance (UPB) in the last quarter of 2017, according to the Federal Housing Finance Agency’s [1] (FHFA) Credit Risk Transfer Progress Report [2] for the quarter. After adding the quarter’s numbers, the GSEs have transferred a portion of credit risk on about $2.1 trillion in single-family loans through credit risk transfers (CRT) since the program began in 2013.

The report, which provides a comprehensive picture of how Fannie Mae and Freddie Mac transfer a substantial portion of credit risk to the private sector through a variety of transactions in the single-family market, indicated that between 2013 and 2017, an additional $972 billion of credit risk was also transferred to primary mortgage insurers.

According to the report, loans targeted for CRTs represented 65 percent of the GSEs’ single-family loan production. The GSEs targeted single-family fixed-rate mortgages with LTVs greater than 60 percent and original term greater than 20 years for these transfers. This was an increase from 59 percent recorded in the same period in 2016, the report said.

“The Enterprises continue to make tremendous progress with credit risk transfer as they benefit from strong private sector market demand,” said FHFA Director Melvin L. Watt.  “This report reaffirms our steadfast commitment to reduce risk to taxpayers and to do so in a transparent way that continues to attract and expand private sector investment.”

On an individual level, Fannie Mae [3] transferred risk on $ 417 billion of UPB while Freddie Mac [4] transferred the risk of $272 billion of UPB. Debt issuance on these numbers for Fannie Mae accounted for 69 percent, while they were 70 percent for Freddie Mac.

Both the GSEs executed front-end CRT transactions, transferring risk at the time the mortgages were acquired, with forward commitments, and utilizing reinsurers and affiliates of mortgage insurance companies, the report said.