November 2016 - End of the Road?

TheMReport — News and strategies for the evolving mortgage marketplace.

Issue link:

Contents of this Issue


Page 57 of 67

56 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T SECONDARY MARKET THE LATEST Freddie Mac Announces Front- end Credit-Risk Sharing Program Deep MI CRT will transfer risk before loans hit GSE balance sheet. F annie Mae and Freddie Mac have been at the forefront of credit risk sharing initiatives since 2013, having transferred to private investors a portion of the credit risk on mortgages with UPB total- ing more than $1 trillion between them through various credit risk sharing programs. Nearly all of those credit risk transactions conducted by the GSEs have been of the back-end variety, however, meaning they have occurred after the mort - gages are already on the GSEs' balance sheets. That changed on in September, however, when Freddie Mac announced a new pilot front-end credit risk transfer offering, Freddie Mac Deep MI CRT. With front-end transactions, the credit risk is transferred before the loans hit the GSEs' balance sheets. The Deep MI CRT pro - vides additional coverage beyond primary mortgage insurance on 30-year fixed rate mortgages with LTVs between 80 and 95 percent, and the coverage is placed im - mediately when the loan is sold to Freddie Mac. All transactions are conducted via a competitive, transparent auction process, ac - cording to Freddie Mac. "Deep MI CRT builds on the success of our Agency Credit Insurance Structure (ACIS) pro - gram 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, SVP 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 taxpay - ers. 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." Palmer continued, "Risk trans - fer outside of the capital markets is a meaningful part of our single- family credit risk transfer strategy, and we continue to explore op - tions to expand our front-end risk transfer offerings." Since introducing its Structured Agency Credit Risk (STACR) program in mid-2013 and subse - quently launching Whole Loan Securities (WLS) and Agency Insurance Credit Structure (ACIS) transactions, Freddie Mac has transferred a significant portion of credit risk on nearly $545 billion of UPB on single-family mortgages and grown its investor base to more than 200 unique investors, including insurers and reinsurers. "The deeper mortgage insur - ance pilot transaction that Freddie Mac is conducting represents an important step in the ongo- ing effort of both Enterprises to enhance their credit risk trans- fer programs," FHFA Director Mel Watt said. "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. The Enterprises have been working with individ- ual mortgage insurance companies on this important issue over the last several months." On the day of the announce- ment, Watt added, "The pilot transaction Freddie Mac is announcing today 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 their coun - terparty exposure and thereby reduce taxpayer risk. This trans- action will include mortgage loans that are originated by lenders of all sizes and it also has certainty of coverage and collateral require - ments that are consistent with other credit risk transfer transac- tions. 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." Lindsey Johnson, President and Executive Director of U.S. Mortgage Insurers, noted that there is still an opportunity for MI to play a greater role in these transactions. "Our industry proposes ex - panding the current risk protec- tion provided by MI, which today guards up to 35 percent of a loan's value, as a means of front-end credit risk transfer that has signifi - cant impact on protecting taxpay- ers while also ensuring borrower access to low down payment mortgages," Johnson said. "By using more MI to provide deeper front-end risk sharing on loans the GSEs guaranty, the GSEs and taxpayers will be at a much more remote risk of losses, while also providing many other positive at - tributes, such as ensuring prudent access to affordable mortgage credit and access for lenders of all sizes and types. Having the GSEs increase that protection coverage would put more private capital at risk—precisely what taxpay - ers and the economy need. We look forward to continuing that dialogue with FHFA, Fannie Mae, and Freddie Mac, policymakers, and other stakeholders."

Articles in this issue

Archives of this issue

view archives of TheMReport - November 2016 - End of the Road?