Perspectives
February 19, 2019

A Year of Milestones and Innovations in Credit Risk Transfer

Gina Healy and Mike Reynolds
By
Gina Healy, Vice President, Credit Risk Transfer
Mike Reynolds, Vice President, Credit Risk Transfer

By many measures, 2018 was an excellent year for Freddie Mac. Our company showed strength and stability across numerous metrics. Borrowers, lenders, investors and taxpayers all benefited from our mission of providing liquidity, stability and affordability to the housing market. One of the driving forces behind those efforts was our Single-Family credit risk transfer (CRT) activity.

For CRT, 2018 marked a year of milestones and continued innovation. Freddie Mac transferred most of the credit risk on approximately $278 billion of Single-Family mortgages through 19 offerings. By year end, we passed a significant milestone by transferring a portion of credit risk on $1.2 trillion in underlying loans since 2013. This exceptional effort reflected the company’s commitment to prudent financial management and ongoing transformation.

For investors and insurers, these transactions provide an opportunity to participate in the U.S. housing market. To those of us at Freddie Mac, our CRT activities mean much more. CRT has transformed our company by making our business better able to withstand economic shocks, reducing risk to U.S. taxpayers and helping to preserve ongoing affordability and liquidity for creditworthy homebuyers.

But both STACR and ACIS made strides in 2018 beyond the bottom-line numbers.

In addition to our record volume, we introduced several improvements and new features to STACR and ACIS in 2018. For the first time, STACR securities were issued by a trust rather than as Freddie Mac debt, resulting in an accounting treatment that better aligns the timing of financial reporting and the issuance’s underlying economics.

Freddie Mac began laying the groundwork for future enhancements to the STACR offering by making a Real Estate Mortgage Investment Conduit (REMIC) election on most loans funded after July 1, 2018. This enables future STACR notes to be classified as REMIC notes. Freddie Mac expects that transitioning from a trust to a REMIC structure will potentially expand STACR’s investor base. This means we can continue to transfer risk away from the company effectively and efficiently.

The ACIS program welcomed two new offerings in 2018, with ACIS ARMR and ACIS AFRM, which helped Freddie Mac transfer additional risk on seasoned loans while providing (re)insurers with a new and innovative opportunity to invest in the U.S. housing market.

AFRM allows Freddie Mac to transfer mortgage credit risk simultaneously with the acquisition of loans by securing committed private capital and by providing stable pricing over a pre-determined time horizon while ARMR helped Freddie Mac transfer additional risk on seasoned loans. Both programs provide (re)insurers with a new and innovative opportunity to invest in the U.S. housing market.

ACIS improvements were not the only insurance-related risk management innovations arriving at Freddie Mac in 2018. The company also introduced its landmark Integrated Mortgage Insurance, known as IMAGIN, to its lineup.

IMAGIN is an enhanced form of mortgage insurance designed to attract additional sources of private capital to support low down payment lending while enabling better management of taxpayer exposure to our mortgage and counterparty risks. Under IMAGIN, Arch Reinsurance initially provides charter compliant mortgage insurance on high LTV loans which is reinsured simultaneously by a panel of Freddie Mac chosen approved reinsurers. Freddie Mac has direct contractual rights directly from the reinsurers. This program lowers costs for borrowers, levels the playing field for lenders of all sizes, and enables better management of taxpayer exposure to our mortgage and counterparty risks.

Undoubtedly, 2018 was a banner year for single-family CRT at Freddie Mac. We surpassed several milestones, which helped us advance our mission of helping to maintain a stable, affordable and liquid U.S. housing market. Our continued evolution of both our STACR and ACIS offerings have helped confirm Freddie Mac as a pioneer in the management of credit risk. Moreover, we expanded our already diverse credit risk transfer offerings through IMAGIN. In 2019 and beyond, we will build on all these efforts, helping us continue to operate as a safer, sounder and more effective company for borrowers, lenders, investors and taxpayers.

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