Fannie Mae’s latest transaction reinsuring multifamily mortgages attracted additional participants, allowing the government-sponsored enterprise to offload more of the credit risk.
The new transaction, CIRT 2018-MO2, transfers the risk of losses on a pool of approximately $10.9 billion of multifamily mortgages that Fannie Mae holds on its portfolio. A total of nine insurers and reinsurers participated, including two that were new to the program; that’s up from seven participants for the prior deal, completed in the second quarter.
Unlike the prior CIRT transaction, which consisted of a single tranche, the latest deal placed two tranches with insurers and reinsurers. Fannie Mae will retain risk on the first 150 basis points of losses; the A tranche will transfer risk to reinsurers covering the next 150 basis points to 300 basis points of losses; and the B tranche will transfer risk to reinsurers covering the next 300 to 400 basis points of losses on the reference pool.
Finally, once the pool has experienced 400 basis points of losses, the credit protection will be exhausted and Fannie Mae will be responsible for any further losses.
By comparison, Fannie Mae is retaining the first 225 basis points of loss on the pool of loans covered by the prior transaction; while reinsurers will cover only the next 150 basis points of loss.
The coverage for both deals is for actual losses and lasts for 10 years.
“Dividing execution into two tranches enabled us to better tailor the exposure to the risk-reward appetite of a particular reinsurer; some prefer coverage closer to a first loss, some prefer more remote risk,” said Jonathan Gross, vice president for multifamily at Fannie Mae.
“Ultimately, by matching the exposures we offer to specific demands of reinsurers we were able to increase market participation and lower the overall price we pay.”
Gross declined to disclose pricing for the latest transaction, except to say that it was more attractive than the prior deal.
The covered loan pool for the latest transaction consists of 1,085 loans, secured by 1,091 multifamily properties, acquired by Fannie Mae from February 2018 through June 2018. Each loan has an unpaid principal balance of $30 million or less. Aside from size — reinsurers prefer to acquire risk on more granular pools of smaller loan — the mortgages being reinsured are broadly representative of Fannie Mae’s multifamily portfolio, according to Gross.
Since 2016, in addition to the risk transferred to its Designated Underwriting System lender partners, in which lenders retain an interest in mortgage they underwrite, Fannie Mae has transferred a portion of the credit risk on multifamily mortgages with an aggregate unpaid principal balance of more than $39.5 billion through its CIRT program.
