Freddie Mac Risk-Sharing Initiatives Support Sustainable Mortgage Finance System
In the debate about the future of housing finance, one thing most parties agree on is the need to reduce the taxpayers’ role in the market. We are leaders in developing and introducing to the market innovative ways to attract new sources of capital, and thereby transfer a portion of our residential mortgage credit risk exposure away from taxpayers and to private firms like banks, insurance companies, and mutual funds. This is not only good for taxpayers, but we think it makes good business sense and have made risk-sharing transactions a part of our business strategy.
This month, we completed our second successful single-family credit risk-sharing transaction through our Structured Agency Credit Securities (STACR®) debt notes offering. This followed the first STACR offering in July. Through these securities, investors who purchased more than $1 billion in bonds now share the risk of a portion of losses that could occur if some mortgage borrowers don’t repay loans. Our most recent debt offering was oversubscribed with more than 50 different investors and received investment grade ratings from Fitch and Moody’s.
We also accessed the global reinsurance community’s appetite for U.S. mortgage credit exposure this month by obtaining an insurance policy of up to $77.4 million to cover losses on a pool of recently-originated residential loans. This insurance policy is another tool to reduce our credit loss exposure and provides an innovative opportunity for insurance and reinsurance companies as well as other financial institutions to invest in the credit performance of Freddie Mac’s high-quality single-family loan portfolio.
In addition, one of our highest priorities is ensuring that our credit risk-sharing transactions have little or no impact on the To Be Announced (TBA) market. The TBA market is critical to maintaining the widespread availability of pre-payable, 30-year fixed-rate mortgages and the ability of borrowers to lock in rates up to 90 days before closing.
Transferring risk to the private sector is not a new concept at Freddie Mac. STACR builds on our success at attracting more than $64 billion in capital over the past five years through our multifamily K-Deal program. K-Deal securities utilize a senior/subordinate bond structure. The unguaranteed bonds, which account for the overwhelming majority of the risk, are sold to private capital investors who assume the first-loss position in the event a loan goes into default or foreclosure. Freddie Mac is one of the largest issuers of multifamily structured debt in the U.S. capital markets.
These initiatives show we’re making good progress transferring into the market a portion of the credit risk that we’ve traditionally retained, helping to reduce the government’s participation in the mortgage market and giving private capital new ways to finance homeownership. We are pleased with the market’s positive response and plan to do more of these transactions next year, as well as develop even more innovative approaches to transfer credit risk from taxpayers to private investors.
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