Freddie Mac announced a move Wednesday aimed at reducing the risk to the taxpayer associated with its credit exposure in the residential mortgage market. The Enterprise has obtained a number of insurance policies underwritten by a panel of “well capitalized insurers and reinsurers”.
The policies were acquired under Freddie Mac’s Agency Credit Insurance Structure (ACIS), which has a stated goal of providing multiple avenues for sharing mortgage credit risk with a diverse spectrum of private investors in a responsible way that does not reduce liquidity or adversely impact the availability of mortgage credit. This is the third insurance transaction of this nature that the GSE has entered into since November of 2013.
The transaction represents the company's largest credit risk transfer of this type and covers up to a combined maximum of almost $285 million of losses for a portion of the credit risk associated with a pool of Single-Family loans acquired in the second quarter of 2013.
"With this third reinsurance transaction, we are bringing in new reinsurance and insurance companies, and distributing risk across more market participants," said Kevin Palmer, vice president of Single-Family strategic credit costing and structuring for Freddie Mac.
Obtaining the insurance is only one method that Freddie Mac is utilizing.
In its 2013 Scorecard goals, Federal Housing Finance Agency (FHFA) instructed both Fannie Mae and Freddie Mac to transfer a significant portion of the credit risk on a minimum of $30 billion of new mortgage securitizations. Both of the GSE’s realized these benchmarks using a combination of structured product sales in the capital markets and different types of insurance-based transactions.
Now a year later, FHFA is raising the stakes by requiring the enterprises to triple the effect of their risk mitigation strategy by transferring a substantial portion of the credit risk on $90 billion of new mortgages. It requires them to, at the very least, continue their current practice of offering structured product sales and insurance transactions to accomplish the goal.
FHFA wants them to go further. The Agency’s 2014 Strategic Plan for the Conservatorship of Fannie Mae and Freddie Mac released in May encourages the enterprises to stretch their risk mitigation programs out even further by engaging in multiple types of risk transfer transactions.
The plan contends that even though investor demand is high at the moment, long term demand for the new offerings has yet to be tested. If the capital markets were to dry up or the enterprises had difficulty obtaining insurance on the mortgage securitizations, it would pose a risk to the long-term strategy. Diversifying the methods will broaden the investor base and aid sustainability.