Freddie Mac has purchased reinsurance for some of the same exposure to losses on residential mortgages that it has unloaded to investors through issuance of general obligation bonds.
The government-sponsored agency said today that it obtained an insurance policy underwritten by Arch Reinsurance Ltd. to 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.
“This further demonstrates Freddie Mac's innovation in developing and introducing new ways to share credit risk with the private market,” the company said in its press release.
Freddie and sister GSE Fannie Mae have been ordered by their regulator, the Federal Home Finance Agency, to transfer the credit risk on at least $30 billion of the single-family mortgages they insure away from taxpayers by the end of 2013.
Freddie Mac previously sold $630 million of notes this month that share its risks on $35.3 billion of loans to about 50 investors, after placing $500 million in its inaugural July deal.
"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, Freddie’s executive vice president of single-family business. "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."
In purchasing reinsurance, Freddie follows in the footsteps of Fannie, which purchased reinsurance over $5 billion in single-family mortgages from National Mortgage Insurance Corp. in October.
The National MI policy covers certain loans acquired by Fannie Mae in the fourth quarter of 2012, each of which had an original loan-to-value ratio (LTV) between 70% and 80%. The terms of the policy result in Fannie Mae’s exposure on these loans being reduced to approximately 50% LTV, subject to a deductible amount and aggregate loss limits.
Fannie also sold $675 million of risk-sharing general obligation bonds in October.