New Credit Risk Transfer Program Expands Liquidity

Fannie Mae's latest CIRT™ transaction reduced taxpayer exposure on $1.1B of multifamily loans. U.S. and overseas insurers and reinsurers made up the investor base.

By Jonathan Gross

Building on a long tradition of transferring risk to the private sector, this past September Fannie Mae completed its first Credit Insurance Risk Transfer™ transaction of 2018 covering existing multifamily loans in the company’s portfolio. This innovative CIRT™ transaction involving multifamily loans guaranteed by us complements ― and supplements ― the model we have used to share risk for over 30 years: our Delegated Underwriting and Servicing program.

We expect multifamily CIRT transactions to be a programmatic offering going forward. This deal, CIRT 2018-M01, which covers approximately $11.1 billion of loans, is a part of Fannie Mae’s ongoing effort to reduce taxpayer risk by increasing the role of private capital in the multifamily mortgage market.

With the DUS® model, lenders generally take on one-third of the credit risk for multifamily loans, while we are responsible for two-thirds of the credit risk. The new transaction completed last month allows us to mitigate the risk on that remaining two-thirds of the credit risk.

In the case of this latest deal, we shared the risk on 1,106 loans backed by 1,111 multifamily properties. These multifamily loans were acquired by Fannie Mae between October 2017 and January 2018, and the individual loan balances are each $30 million or less.

Learning From the Past

This month’s deal is not our first transaction mitigating credit risk for multifamily loans. We completed our first offerings in 2016 and 2017. Working with our partners in the market, we tested and learned from these first two deals. Last month’s offering is the result of that early effort. To date, we have transferred the risk on $28.5 billion (unpaid principal balance) worth of risk on multifamily loans.

For a little bit of context, last year we helped finance about $67 billion worth of multifamily loans. The total unpaid principal balance multifamily debt guaranteed by Fannie Mae is $291.4 billion, as of the end of July 2018.

Attracting global investor interest

So, you may ask: Who are the investors participating in these transactions and how does their participation help liquidity for the multifamily market?

The investors participating in these offerings are insurers and reinsurers based in the U.S. and overseas. For insurers and reinsurers the attraction to these transactions is that they offer an opportunity for them to diversify their investment portfolios. For us, the participation of these insurers and reinsurers means there is a deeper and more resilient pool of liquidity for the multifamily market, benefitting taxpayers, our borrowers and their tenants.

CIRT 2018-M01 marks the beginning of a regular effort to manage risk with the help of insurers and reinsurers. We plan to return to the market on a regular basis with these transactions, with two or three of these credit insurance risk transfer deals each year.

So, how do these offerings work? In the most recent deal, if Fannie Mae’s share of losses on $11.1 billion worth of multifamily debt (unpaid principal balance) total 2.25 percent to as much as 3.75 percent, then reinsurers will come in and cover those losses.

Curious about delinquency rates? The serious delinquency rate for our overall book of multifamily loans ― loans 60 days or more past due ― was 0.09 percent as of July 31, 2018. During the financial crisis the serious delinquency rate for loans in our DUS program peaked at 0.56 percent in 2010.

If the concept of managing risk tied to loan defaults through a credit insurance risk transfer deal sounds familiar to some of you ― it should. We have used this tool to mitigate the risk on over $1 trillion of single-family loans. In fact, we borrowed some of the basic ingredients from the innovative single-family recipe for our own effort. And, like the single-family credit insurance risk transfer program, our multifamily CIRT transaction is just one more tool to protect taxpayers and keep open the tap for our lender partners and the owners and tenants they serve.

Jonathan Gross is vice president, Portfolio Strategy and Analytics, Economics and Credit Risk Transfer, at Fannie Mae.

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