January 19, 2016

What Have We Learned From Transferring Credit Risk?

Kevin Palmer
Kevin Palmer, SVP, Single-Family Portfolio Management

A new asset class sprang to life in July 2013 when Freddie Mac introduced our Structured Agency Credit Risk (STACR®) security. This also marked the beginning of a new strategy to expand our efforts to sell credit risk on single-family mortgages we purchase and guarantee to private investors. In the past, our primary way to transfer this risk was through private mortgage insurance (MI), which is still an important avenue to transfer credit risk.

By shifting more of our potential credit losses to private investors, we've led the way in transforming how a significant portion of the U.S. housing market is funded. This further protects U.S. taxpayers from backstopping GSE credit losses and helps to build a more robust system that can keep overall mortgage rates low, while creating a more sustainable mortgage funding model. In fact we have already seen taxpayer benefits and received compensation from investors on loans that have defaulted.

While some of the new GSE Single-Family Credit Risk Transfer (CRT) market is still in the early innings in its overall development, our offerings have been well received with more than 190 unique investors participating in our three new signature offerings: credit risk securitization through STACR and Whole Loan Securities (WLS), and insurance contracts obtained under our Agency Credit Insurance Structure (ACIS®) program. To date, through STACR, WLS and ACIS we have laid off a portion of credit risk on $385 billion in Single-Family residential mortgages, raising about $16 billion to protect us from mortgage default losses.

What have we learned?

  • If we build it, they will come. Private capital across the globe is available and willing to take on mortgage credit risk at reasonable prices. Those investment segments interested in our existing and new CRT programs consist of money managers, insurance companies including MIs and reinsurers, real estate investment trusts (REITs), sovereign funds, hedge funds, banks and credit unions.
  • Have skin in the game. For investors to get comfortable with this new asset class, it is important that our interests be aligned with the investors', so we keep a portion of the risk in our CRT programs while also transferring a large amount of risk to investors.
  • One size does not fit all. Having multiple types of CRT products provides us with options to transfer risk across a range of economic environments. We experienced that last year when we were able to transfer more risk to the insurance markets when the capital markets experienced market volatility.
  • Communication is critical. We have held hundreds of meetings with investors to share with them our quality control and loan servicing processes, practices, and standards.

Our plans for this year include continuing to innovate by looking for ways to further improve the liquidity in our offerings such as STACR, increase transparency with investors, and broaden the investor base domestically and internationally to promote its depth and better reflect the breadth and diversity of available private capital.

While we are only a few years into what is likely to be a decade-long transformation of the mortgage credit risk transfer market, our leadership in this area will impact mortgage finance for years to come. We’ve taken an important step toward improving the housing finance system, and are encouraged by the positive investor interest in our offerings. We are excited to be a leader in such an important historical undertaking and in reducing losses borne by taxpayers.

Watch our animated video on how we’re building a better housing finance system by transferring credit risk away from taxpayers to the private capital markets.