Freddie Mac has developed another product that transfers the credit risk on mortgages before they are securitized.
It is an iteration of ACIS (Agency Credit Insurance Structure), a reinsurance contract used to transfer the risk on mortgages that have already been securitized. Like ACIS, the new product, AFRM (ACIS Forward Risk Mitigation), is used to transfer a portion of the risk that will not be transferred through Freddie’s flagship product, STACR (Structured Agency Credit Risk).
And like ACIS, the reinsurance covers losses beginning at 50 basis points all the way up to 400 basis points.
This is designed to dovetail with STACR, which are not reinsurance contracts but general obligation bonds whose performance is linked to that of a reference pool of mortgages. Each STACR offering consists of several tranches of notes; Freddie holds on to half of the tranche representing the first-loss position and keeps a small portion of the mezzanine tranches transferring successive losses. The remaining first-loss and mezzanine notes are sold to capital markets investors.
Both ACIS and AFRM are complementary to STACR. The difference is that AFRM transfers this risk as soon as Freddie acquires the loans. Rather than reinsuring an existing pool of loans, the insurers are committing to reinsure a certain amount of loans meeting certain criteria that Freddie will acquire over the next two years.
The first AFRM deal, which was marketed in December, transfers a portion of the credit risk on pools of single-family loans with a combined unpaid principal balance of approximately $21 billion to a diverse panel of reinsurers. The coverage has a maximum limit of approximately $650 million. This covered pool will consist of 30-year fixed-rate loans with loan-to-value ratios between 60% and 97%.
This reinsurance will stay in place for 10 years after the loans are acquired, though the contracts can be called after five years. Eventually, Freddie will reinsure a larger portion of the credit risk on this pool through other credit risk transfer products.
This is only Freddie’s third transaction transferring credit risk on loans as soon as they are acquired; in September 2016, it launched a pilot program using private mortgage insurance. However, in that program, insurers only committed to insure loans acquired over the following nine months.
"AFRM is the first CRT product to secure private capital from investors committed to provide coverage on loans funded over the next two years and represents an important milestone in the expansion of the ACIS program," Gina Subramonian Healy, Freddie’s vice president of credit risk transfer, said in a press release Thursday.
Freddie and sister company Fannie Mae are required by their regulator to transfer the credit risk on 90% of the balance of newly acquired 30-year fixed-rate mortgages, their core business.
Since ACIS's inception in 2013, Freddie has placed nearly $9 billion in insurance coverage, transferred a portion of credit risk on approximately $872 billion of single-family mortgages. The company has grown its investor base to more than 220 unique investors, including insurers and reinsurers.
"We'll continue to explore ways to evolve our front-end CRT offerings to transfer more credit risk away from taxpayers and provide investors new ways to invest in the U.S residential housing market," Subramonian Healy said.
