Perspectives

Landmark Transaction Marks Major Innovation in Benchmark Credit Risk Transfer Program

Laurel DavisEarlier today Fannie Mae completed the pricing of our first Connecticut Avenue Securities REMIC (CAS REMIC) transaction. This milestone offering facilitates additional private capital participation in the American residential mortgage credit market. It also marks our latest and the most substantial innovation in five years of progress to reduce the risks to U.S. taxpayers in the secondary mortgage market and deepen the sources of sustainable liquidity for U.S. mortgage lenders.

Today's transaction, CAS 2018-R07, transfers a portion of the credit risk on $922 million worth of single-family home loans acquired by Fannie Mae from April 2018 to June 2018.

While our CAS deals are not new, the difference here is that Fannie Mae has taken a real estate mortgage investment conduit (REMIC) election on the loans underlying these securities, which results in our ability to issue CAS notes as REMIC securities. This enables the large and vibrant real estate investment trust (REIT) market and international investors to expand their participation in the CAS program.

Going forward, all CAS offerings will be issued as CAS REMICs.

Innovation requires collaboration, and our elegant CAS REMIC structure was no exception. Fannie Mae incorporated feedback from multiple industry stakeholders to ensure the REMIC election did not disrupt existing Fannie Mae mortgage-backed securities (MBS), or the To-Be-Announced (TBA), market.

A vote of confidence for the new structure came from the Securities Industry and Financial Markets Association (SIFMA). SIFMA's TBA Committee voted on the proposal, identifying no issues that would impair the TBA eligibility of Fannie Mae MBS under the new structure. Another partner was the National Association of Real Estate Investment Trusts (Nareit), which coordinated valuable outreach with its REIT members in support of the structure. We also worked closely with the Financial Industry Regulatory Authority (FINRA) to maintain consistency in TRACE reporting.

Benefits for investors include:

  • CAS REMIC notes satisfy all of the REIT income and asset tests for tax purposes;
  • Removal of tax withholding restrictions for non-U.S. investors in all tranches;
  • Insulation for investors from potential future counterparty risk exposure to Fannie Mae;
  • Simplified and aligned tax treatment of CAS with other mortgage-related securities.

In addition, under the new CAS REMIC structure, Fannie Mae will be able to recognize the benefit of the credit protection provided by the CAS REMIC notes at the same time we recognize the loss on the loan for accounting purposes. Whereas with CAS debt notes, there can be a significant lag between the time when we recognize a loss on the loan and when we recognize the related recovery from the CAS transaction.

CAS 2018-R07 is the latest example of an ongoing effort to reduce risk to taxpayers while ensuring there is a consistent source of liquidity available to U.S. homebuyers. It complements other Fannie Mae risk sharing initiatives, like our Credit Insurance Risk Transfer (CIRT) reinsurance program.

With the close of this transaction, through the CAS program alone, since 2013 we will have brought 30 deals to market, issued $36 billion in notes, and transferred a portion of credit risk on over $1 trillion in single-family mortgage loans at the time of the transactions to private investors. Approximately 36% of the loans in our single-family conventional guaranty book of business were covered by a credit risk transfer transaction as of June 30, 2018.

Newcomers to today's innovative offering and buyers of previous CAS issuances have been attracted to our strong end-to-end credit risk management and the transparency of our program, aided by tools such as Data Dynamics®, our free web tool enabling analysis and insights into CAS and CIRT deals. Data Dynamics allows users to interact with and analyze historical loan performance data, deal issuance data, and ongoing disclosure data that Fannie Mae makes available to support our credit risk-sharing programs.

We are confident that the latest enhancements to our CAS program will advance our goals of creating a broad and liquid market for credit risk that mitigates taxpayer risk, while offering attractive investment options for investors in mortgage credit. By balancing all of these considerations, we continue to build and maintain a stronger housing finance system.

Laurel Davis
Vice President for Credit Risk Transfer

October 31, 2018

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