TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/222840
Local edition s e c on da r y m a r k e t a na ly t ic s se r v ic i ng Or ig i nat ion SECONDARY MARKET Freddie Mac Cuts Taxpayers' Exposure to Risk with Insurance Purchase In an effort to mitigate potential losses incurred by a questionable pool of single-family loans, Freddie Mac announced that it has obtained an insurance policy underwritten by Arch Reinsurance Ltd. The policy will cover up to $77.4 million of credit losses for a portion of the credit risk associated with a pool of single-family loans funded in the third quarter of 2012, and is in line with the GSE's goal of sharing credit risk with the private market. This new insurance coverage is intended to attract new sources of private capital from nonmortgage guaranty insurers and reinsurers interested in assuming a portion of the credit risk on specified portions of Freddie Mac's high-quality single-family mortgage loan portfolio. "This is part of our business strategy to expand risk-sharing with private firms, thus reducing taxpayers' exposure to losses from mortgage foreclosures," said David Lowman, EVP of single-family business for Freddie Mac. "We have brought to the market new sources of capital for transferring mortgage credit risk away from taxpayers. We've tapped into the global insurance community's appetite for U.S. mortgage credit exposure, and would like to do more of these policies in the future." This year Freddie Mac introduced new risk sharing initiatives with two STACR debt offerings and credit insurance. STACR debt notes were among the largest credit security offerings in the market. The credit risk initiatives support the Federal Housing Finance Agency's (FHFA) goals for the GSEs to demonstrate the viability of multiple types of risk transfer transactions involving single-family mortgages. 62 | The M Report "The completion of this deal is unique in that it is with a diversified non-mortgage insurer and it demonstrates yet another approach to risk sharing with investors," said Edward DeMarco, acting director of FHFA. "The transaction supports FHFA's 2013 conservatorship scorecard rules. Fitch Ratings released a report revealing its expectations for how the rules will impact future loss severities on residential mortgage-backed securities (RMBS) and how the agency will adapt its ratings. Overall, Fitch "expects greater uniformity in underwriting to result from the rule, which and FHFA's strategic plan for the enterprise conservatorships, reducing Freddie Mac's market footprint and ultimately protecting taxpayers." would be viewed as a positive for RMBS." One change Fitch anticipates after implementation of the new rules is the labeling of each loan in a securitization pool—QM, higher-priced QM, non-QM. Enhanced due diligence, especially in the short term, is also expected. Fitch anticipates 100 percent due diligence on QM and higher-priced QM loans in the short term, and then a lower percentage of due diligence for QM loans after the market has adjusted. "Until the originator is able to effectively demonstrate to January Guidelines to Alter RMBS Rating Criteria As lenders prepare to adopt the Ability-to-Repay (ATR) and Qualified Mortgage (QM) rules in January, so too are ratings agencies preparing for these new Fitch that its origination process ensures compliance with the rule, 100 percent of due diligence reviews will be expected to have been completed on loans included in an RMBS transaction from that originator," Fitch said. Fitch will also look for originator reviews when at least 15 percent of an RMBS is contributed by one originator. Fitch will take the following into consideration for ratings: compliance procedures, due diligence results, labeling regarding QM versus non-QM, and "a confirmation of satisfactory reps and warranties in the RMBS transaction relating to compliance with the rule." Fitch believes higher-priced QM loans may be open to more litigation risk and longer liquidation timelines than other QM loans, which would increase loss severity on these loans. While they may be open to more litigation, Fitch "expects actual incidence of litigation may be limited." In part, this is due to the fact that these claims may be difficult to prove. The borrower will need to prove that "based on the information that the creditor was aware of at the time of consummation of the loan, the borrower was not left with sufficient residual income or assets to meet basic living expenses," Fitch said. On the other hand, non-QM loans will have greater litigation risk, despite having the same cap on damages as higher-priced QM loans because they have a lower burden of proof, according to Fitch. "In select cases, Fitch expects the added litigation risk will require additional protections, such as focused originator reviews, full ATR compliance due diligence, and higher loss severity assumptions," the agency said in its report. Fitch is accepting comments on ratings issues related to the ATR and QM rules through December 9 at RMBSfeedback@ fitchratings.com.