Perspectives
February 17, 2021

Single-Family CRT Delivers Its Best Year Ever

Mike Reynolds
By
Mike Reynolds, Vice President of Single-Family Credit Risk Transfer

Pioneered by Freddie Mac in 2013, the Single-Family credit risk transfer (CRT) program is an essential part the company’s effort to be a premier manager of risk. Through CRT, we structure mortgage credit risk into securities and (re)insurance offerings, transferring credit risk exposure from U.S taxpayers to private capital. CRT supports Freddie Mac’s mission of providing stability, liquidity and affordability to the U.S. housing market, enabling us to fund homebuying for millions of families in good times and bad.

The marketing of 2020’s last STACR® and ACIS® transactions closed out the biggest year ever for Freddie Mac Single-Family CRT issuance. We offered 11 STACR® (Structured Agency Credit Risk) and 13 ACIS® (Agency Credit Insurance Structure) transactions.

Our achievement was all the more remarkable considering the challenges we faced in supporting and advancing the CRT asset class this year.

The Pandemic Hits

We began 2020 in an enviable position. Strong demand for our CRT notes and contracts had driven down our costs. In January, spreads on our note issuances—essentially the price we paid to credit protect our then $2 trillion Single-Family mortgage portfolio—were historically tight.

That might have been the story for the entire year if it had not been for a novel new virus spreading around the world.

It was clear by the end of the first quarter that the worsening COVID-19 pandemic would adversely impact the U.S. economy, putting many Americans out of work and making it more difficult for them to make mortgage payments. As our estimate of delinquencies began to grow, we paused our CRT programs to assess the impact of the crisis.

The secondary market for CRT securities was a key indicator. There had been a substantial decrease in prices for securities due to uncertainty around COVID-19’s potential impact to the economy and conditions in the repo market, which resulted in some bonds losing as much as 40 to 60 percent of their value.  However, the market recovered by the middle of the second quarter. We felt demand for our securities was likely to be relatively strong, and the market would welcome new offerings by the end of the quarter.

Just as important, Freddie Mac continued to view CRT as a strategic risk management tool and saw value in pushing forward with our scheduled offerings to investors.

An Unwavering Commitment to Investors

Unable to meet with investors in person due to COVID-19 restrictions, we organized a series of Investor Day virtual events. Spread out over two weeks in June, the series featured Freddie Mac experts taking questions and discussing economic and housing markets, portfolio management and analytics, operational efficiencies, servicing policy and credit risk management—all through a COVID-19 lens. It was Freddie Mac’s highest attended Investor Day program, with more than 270 unique external attendees, representing more than 100 companies.

Freddie Mac released its COVID-19 CRT Resources web page in time for the event. The page included an extensive FAQ on COVID-19 related impacts to CRT, links to Single-Family Seller/Servicer Guide Bulletins explaining the company’s policies for loans in forbearance and economic and housing forecasts from the Freddie Mac economics unit.

In addition, we quickly pivoted and reprioritized the roadmap for Clarity, our data intelligence portal, to give investors critical insight into affected loans and easy access to the single-family historical dataset. Eight packaged enhancements to Clarity were rolled out in 2020, including major new functionality, incremental value-added enhancements, increased ability to download data and improvements to the user interface.

As Freddie Mac continues to be a programmatic issuer in the CRT space, we also will continue to invest in Clarity – based on the needs and wants of the platform’s users.

Re-energizing the CRT Market

The preparation and investor education paid off. At the end of June, we were back in the market with STACR 2020-DNA3. Initially, the offering was to be approximately $555 million; however, the transaction was quickly upsized due to investor demand, closing at $1.1 billion.

We rapidly followed with an ACIS transaction, transferring residual reference risk on the same 2020-DNA3 reference pool. That transaction, with a maximum limit of up to approximately $425 million of losses on the $48.3 billion pool, also doubled from its planned size.

An electrified trade press covering the return of the offerings indicated the asset class Freddie Mac had pioneered was back. Two more STACR transactions hit the market in July and August – again upsized – and each was followed with a successful ACIS counterpart. By the beginning of September, we had solidly re-established Freddie Mac as the premier programmatic issuer of CRT notes.

Transitioning to a New Index Rate

In October, we navigated another potential disruption: the long-planned transition from LIBOR, the reference rate for Freddie Mac CRT since 2013, to the new Secured Overnight Financing Rate (SOFR).

We began preparing for the LIBOR-to-SOFR transition more than two years ago. Under the guidance of the Federal Housing Finance Agency (FHFA), the team worked closely with Fannie Mae and FHFA to ensure an aligned approach in our transition to SOFR-based CRT issuances.

We solicited input from CRT investors, broker/dealers and other key market participants. Based on their feedback, we released our CRT LIBOR Transition Playbook and FAQs in May 2020. The playbook set out a roadmap to a SOFR-indexed STACR issuance in the fourth quarter of this year. We met that deadline, selling our last LIBOR-indexed STACR notes in September and launching the first SOFR indexed notes, STACR 2020-DNA5, in October. The transition has been a success, and all new Freddie Mac STACR offerings are now tied to SOFR.

Looking Ahead to 2021

Beyond our plan for continued issuances in 2021, other considerations—regulatory or political—may play into the ongoing strength and success of our Single-Family CRT programs. Those are largely beyond our control. What we do control is the effectiveness of our risk management, our innovative approach to tailoring transactions to investor needs and market conditions and our ongoing commitment to leadership in this asset class. Those are the factors that continue to drive investor demand and (re)insurance participation, as well as substantially reduce risk to our company, U.S. taxpayers and the overall economy.