Credit risk transfers

As the inflation reduction campaign has miles to go, banks considering credit risk transfers referencing commercial real estate could find enthusiastic investors.

The real estate investment trust arm of two affiliate mortgage-related companies could reduce other debt and finance purchases of loans, servicing or securities.

The government-sponsored enterprises will likely have their mainstay bonds exempted from the potential securitization-related rule, but their credit-risk transfers could be subject to it, some experts say.

The two latest transactions follow in the wake of the government-sponsored enterprise’s first deal of the year and the release of a finalized capital rule aimed at facilitating broader risk-sharing.

Issuance of capital market instruments aimed at protecting one government-sponsored enterprise from distressed mortgage credit events staged a relatively quick rebound in 2020, a new Federal Housing Finance Agency report shows.

Oaktree Re VI 2021-1 will market $531 million in CRT notes that will provide NMI with partial reinsurance on a $45B pool of GSE-eligible loans.

The $16.9 billion in issuance marked the biggest annual number seen since the government-sponsored enterprise reconstituted its risk sharing program in 2013.

The reference pools of mortgages supporting the credit-risk transfer notes sold by Fannie Mae and Freddie Mac were 'generally lower' in delinquencies per newly issued monthly reports, says DBRS Morningstar.

Fannie hasn't completed any credit risk transfers to private investors since the second quarter. Some experts worry the decision — likely spurred by the company’s concerns about a recent capital regulation — could put the mortgage giant on unsteady footing.

While using the 30-day SOFR as its index, Freddie Mac structured the deal so it could shift to a one-month term if and when that rate is approved.