Freddie Mac Continues To Innovate Its CRT Program

Government-sponsored enterprise (GSE) Freddie Mac says it has developed a new front-end credit risk transfer (CRT) offering, Freddie Mac Deep MI CRT, that provides additional coverage beyond the primary mortgage insurance on 30-year, fixed-rate mortgages with loan-to-value (LTV) ratios of 80% to 95%.

This additional coverage is provided through a forward credit insurance policy by a panel of mortgage insurance company affiliates and is placed immediately upon the sale of loans to Freddie Mac. Transactions are executed via a competitive, transparent auction process, the firm states in a release.

Freddie Mac calls this a “further innovation” of its credit risk-sharing program, and it coincides with a general trend among both GSEs to broaden the range of investors they target with their first-loss and mezzanine CRT opportunities.

“Deep MI CRT builds on the success of our Agency Credit Insurance Structure [ACIS] program and is the first credit risk transfer offering in the market with a flow-basis structure on loans purchased from our diverse lender base,” said Kevin Palmer, senior vice president of credit risk transfer at Freddie Mac. “The pricing certainty provided by day-one coverage offers us an economically sensible way to transfer mortgage credit risk away from taxpayers. Deep MI CRT embodies all the core elements of our single-family credit risk transfer program and also helps us expand our important relationships with mortgage insurers.

“Risk transfer outside of the capital markets is a meaningful part of our single-family credit risk transfer strategy, and we continue to explore options to expand our front-end risk transfer offerings,” Palmer added.

Freddie Mac reports that since it first introduced its credit risk-sharing initiatives in 2013 – including its Structured Agency Credit Risk debt notes, ACIS and Whole Loan Securities – it has grown its investor base to more than 200 unique investors, including insurers and reinsurers.

So far, Freddie Mac has transferred the credit risk on nearly $545 billion of unpaid principal balance on single-family mortgages.

In a statement, Mel Watt, director of the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, said, “The deeper mortgage insurance pilot transaction that Freddie Mac is conducting represents an important step in the ongoing effort of both enterprises to enhance their credit risk transfer programs.

“Assessing the feasibility of such front-end credit risk transfer structures is a conservatorship priority and was included in the 2016 Scorecard for the enterprises,” Watt said. “The enterprises have been working with individual mortgage insurance companies on this important issue over the last several months.”

Watt said the new offering “is consistent with the principles FHFA laid out in June in our Single-Family Credit Risk Transfer Request for Input, including the ability of an enterprise to manage [its] counterparty exposure and thereby reduce taxpayer risk.

“This transaction will include mortgage loans that are originated by lenders of all sizes and it also has certainty of coverage and collateral requirements that are consistent with other credit risk transfer transactions,” Watt said.  “Further, the coverage begins at the time the loans are delivered to the enterprise, consistent with FHFA’s definition of a front-end credit risk transfer.

The FHFA is requesting input on the proposed offering. Input is due by Oct. 13.

“The performance of this pilot transaction and the feedback we receive from stakeholders will be critical as FHFA explores additional ways to enhance the Enterprises’ credit risk sharing with private investors,” Watt said.

In a separate statement, David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA), said the association appreciates Freddie Mac’s efforts to bring more private capital into the market through this new credit-risk transfer offering.

“In this early stage of the credit risk transfer market, it is important to experiment with different transactions and structure types to evaluate their long term economic and competitive impact,” Stevens said. “Mortgage insurance offers a well-developed, scalable solution that would benefit consumers and is something that all lenders could use today.

However, Stevens said there is opportunity for much greater participation by private mortgage insurers in the GSEs’ CRT programs.

“Going forward, we would like to see FHFA and the GSEs take advantage of the existing lender-MI company relationships to share risk through deeper loan level primary mortgage insurance, as opposed to the GSE negotiated version that they just rolled out,” Stevens added. “Otherwise, we are wasting the competitive value of mortgage insurance companies both working directly with lenders, as well as being able to pass value directly to consumers.”