For the past three years, Fannie Mae has transferred a substantial portion of credit risk to mortgage insurance affiliates. But until now, all of those transactions have been of the back-end variety.
On Friday, Fannie Mae announced that it has secured commitments for its first-ever front-end Credit Insurance Risk Transfer (CIRT) transaction to be executed with affiliates of mortgage insurance companies.
When the transaction is complete, it will be the first CIRT transaction Fannie Mae has done on a “flow” basis, which means the transfer occurred before Fannie Mae acquired the covered loans, also known as a front-end transaction. The insurance coverage becomes effective upon Fannie Mae’s acquisitions of the loans.
With this transaction, a portion of credit risk on pools of single family loans totaling $3.7 billion in UPB will shift to a group of approved mortgage insurance affiliates. The covered pool contains 30-year fixed-rate loans with LTVs between 80 and 97 percent, according to Fannie Mae.
The loan pool is expected to be filled over a six-month period, beginning with deliveries in the fourth quarter of 2016.
“This innovative pilot transaction represents another milestone for Fannie Mae’s risk transfer initiative. Front-end CIRT expands the options that Fannie Mae can use for transferring mortgage credit risk away from taxpayers, while tapping a diverse source of capital and risk-sharing partners,” said Rob Schaefer, Fannie Mae’s vice president for Credit Enhancement Strategy & Management. “Through our partnership with several approved mortgage insurers and their affiliates, we are able to bring to market a new structure that leverages the enhancements that were pioneered in our existing CIRT program, including a streamlined operational process, improved certainty of coverage, and enhanced counterparty protections.”
Fannie Mae plans to continue offering traditional CIRT transactions to cover existing loans in its portfolio.
Fannie Mae has transferred a portion of the credit risk on more than three-quarters of a trillion dollars in single-family mortgages through various programs, including CIRT, Connecticut Avenue Securities (CAS), and other forms of risk transfer, allowing private capital to gain more exposure to the U.S. housing market.
Click here for more information on Fannie Mae’s credit risk transfer initiatives.