Fannie Mae Takes Insurance on $11B in Debt in First Multifamily Risk-Transfer Deal
By Matt Grossman September 7, 2018 12:15 pm
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In a first-of-its-kind transaction, Fannie Mae has bought private insurance on $11.1 billion worth of multifamily debt, a deal the agency is calling a credit insurance risk transfer.
The deal transfers a cross-section of risk from 1,106 loans that Fannie Mae made between October 2017 and January 2018 to a group of seven insurance companies, according to an announcement from the agency. In exchange for premiums from Fannie, the insurers will backstop a middle slice of potential losses on the loans, taking responsibility for shortfalls between 2.25 percent and 3.75 percent of the total balance. Fannie Mae retains responsibility for the first 2.25 percent of potential losses, and would also be on the hook for any damage beyond 3.75 percent.
Jonathan Gross, a vice president in Fannie Mae’s multifamily business, declined to name the insurers who participated because he said identifying them was prohibited by Fannie Mae’s contracts, but he described them as “major reinsurance-market participants.”
The deal follows a series of smaller trial deals that Fannie launched over the last two years to test the concept. The scope of insurers’ interest in the new transaction—which comprises loans worth less than $30 million each—speaks to Fannie Mae’s strong underwriting, according to Gross.
Over the course of the trial deals, “we went from a handful of reinsurers to seven major participants, and we were oversubscribed by almost $100 million,” Gross said. “[The $11.1 billion credit risk transfer] validates a very smart class of investors looking at this and saying, ‘we think this is a good, soundly underwritten program.'”
Fannie Mae has long routinely sheltered itself from one-third of the risk on all multifamily loans it purchases, because the lenders who sell loans to the government-sponsored entity pledge to keep that portion of the risk on the Fannie Mae debt they originate. The goal of the new credit insurance risk transfer program is to mitigate the remaining two-thirds of potential losses, which Gross said was a way to keep taxpayers off the books for losses on real estate loans.
During the 2008 financial crisis, Fannie Mae received a $116 billion government bailout related to losses it sustained from defaults in its single-family business. Multifamily delinquencies, on the other hand, never rose above 0.6 percent at the crisis’s nadir, Gross said, a record that made the agency’s multifamily debt appealing to insurers as a way to take on risk that wouldn’t overlap with other policies they’ve issued.
“What they liked is that [the risk] isn’t correlated to their core exposure,” Gross said. “From their perspective, this was a way to take on risk that’s not correlated to the risk they’re not already exposed to.”
