Credit risk transfers

The residential mortgages being reinsured are less risky, by several measures, than its previous deal; none of the borrowers have ever missed a payment.

This time, investors required Radian to hold on to the first 2.5% of losses it covers on the pool; by comparison, the insurer’s previous deal, Eagle Re 2018-1, had a lower “attachment” point of 2.25%.

An emerging gap between the government-sponsored enterprises on a Federal Housing Finance Agency scorecard item is prompting Fannie Mae to diversify its multifamily credit risk transfer efforts.

While reinsurers are becoming more comfortable with the risk it is offloading, the GSE wants to maintain control of the workout process for loans that go bad.

Arch Capital’s next offering of credit risk transfer notes features heavy exposure to residential mortgages that have been modified by Fannie Mae or Freddie Mac.

Credit risk transfer does more than just reduce exposure to a downturn in the housing market. It also provides them with information about how others view mortgage credit risk.

This year saw elation over the rollback of risk retention for CLOs give way to concerns about leveraged lending, the 1st post-crisis downgrade of a subprime auto deal, the 1st AAA for commercial PACE, and much, much more.

Dividing the transaction into two tranches allowed the GSE to tailor the transaction to the risk appetite of participants, lowering the cost of reinsurance.

Laurel Davis, VP, credit risk transfer at Fannie Mae, explains why the switch to a REMIC structure for CAS is important, and why it took so long.

The company’s first transaction, Eagle Re 2018-1, transfers a portion of the credit risk on approximately $36.3 billion of mortgages, according to Morningstar Credit Ratings.