It’s a risk-sharing attempt that relies on regulators’ support.
Freddie Mac made an email statement on the subject of the policies. These were tied to loans bought or guaranteed by the taxpayer-backed mortgage giant in the second quarter of 2013 from a group of insurers and reinsurers.
The names of the players involved in the transaction have not been made public. What is known for now is that they are four companies that have shown interest in participating on a regular basis, while remaining consistent with the market standards.
A similar insurance deal was announced by competitor Fannie Mae – also operating under regulator patronage – in October.
Last year, Freddie Mac started cutting its exposure to losses on more than $100 billion home loans. The protective measure was put into practice through the sales of new insurance policies and risk-sharing bonds obtained from companies such as Arch Capital Group Ltd.
The latest policies aim at diverting the risks from the same group of single-family loans. Freddie Mac referenced these mortgages by selling risk-sharing bonds in February. The home loans as such are packaged in different other types of securities guaranteed by the company.
Fannie Mae and Freddie Mac are operating a transfer of their risk to the private market. This follows the legislation model envisioned by the Senate’s Banking Committee this year. The expectations of the Federal Housing Finance Agency for May 2014 were encouraging. The risk-sharing transactions are supposed to protect taxpayers against bearing all the potential losses, with 60% of new mortgages being backed by companies.
As reported by Fitch Ratings, there have been minimal delinquencies on the mortgages referenced by $1.8 billion of risk-sharing bonds sold by Fannie Mae and Freddie Mac in 2013, and by $4.3 billion placed this year. Figures thus indicate better credit attributes compared to historical averages. The rating firm further mentioned that only 0.17% of home loans are currently delinquent.
For loans with less than 20% down payments, Fannie Mae and Freddie Mac rely on mortgage insurers to bear losses. In order to achieve even more advanced protection, Fannie Mae sold the first securities tied to such loans in May, this year.