Fannie Mae is planning another transaction that shifts credit risk on mortgages before it acquires them.

This will be the second such transaction completed on a flow basis, meaning the risk transfer will have been committed prior to Fannie Mae’s acquisition of the covered loans and the insurance coverage will be effective as soon as the loans are acquired. Coverage and pricing are committed for 12 months, beginning with first quarter 2017 deliveries.

A group of reinsurers have agreed to provide the coverage on a “flow” basis to single-family loans with a combined unpaid principal balance of approximately $15 billion. These loans must meet certain criteria, such as a 30-year fixed-rate term and loan-to-value ratios between 60% and 80%.

Fannie Mae will retain risk for the first 50 basis points, or $46 of loss on the loans, AFterlion. If this approximately $75 million retention layer is exhausted, the participating mortgage insurance companies will cover the next 250 basis points of loss on the pool, up to a maximum coverage of approximately $375 million.

Coverage for these deals will be provided based upon actual losses for a term of 10.5 years from the effective date. Depending upon the pay-down of the insured pool and the principal amount of insured loans that become seriously delinquent, the aggregate coverage amount may be reduced at the 18th month following the effective date and every 12 months thereafter. The coverage may be canceled by Fannie Mae at any time on or after the 66th month following the effective date by paying a cancellation fee.

Fannie Mae plans to continue offering its traditional CIRT transactions that cover existing loans in its portfolio. 

“With this transaction, Fannie Mae pioneers new ground by securing the longest and largest forward commitment ever transacted for a GSE risk transfer transaction, locking in our pricing for the full 2017 calendar year,” said Rob Schaefer, Vice President for Credit Enhancement Strategy & Management, Fannie Mae. “This deal also demonstrates our continued market leadership by providing a high level of transparency with respect to the deal pricing and structure.”

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