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WASHINGTON, DC–Fannie Mae has just completed a transaction in which 7 reinsurers and insurers took on about $166 million of multifamily credit risk on a pool of debt that totals around $11.1 billion. The transaction, a credit insurance risk transfer, is the first time Fannie Mae widely marketed these assets to reinsurers and was pleasantly surprised to find the deal oversubscribed, according to Jonathan Gross, Vice President, Multifamily, Fannie Mae.

The GSE had done two quiet “test and learn” transactions prior to this one, which went well, Gross tells GlobeSt.com. This transaction “marks our pivot on doing this on a programmatic basis.” Fannie Mae plans to do another deal this year and, going forward in 2019, two to three deals per year.

Those initial transactions were more to help the GSE see what the structure would look like and what questions a reinsurer would have, Gross says. It learned that reinsurers prefer to avoid large loans in the policy and gravitate to loans that are covered to have $30 million UPB or less. “They want to avoid a situation where a single loan or small handful of loans would result in loss levels,” Gross says. “They are more comfortable being exposed to a broader risk, not property specific risk.”

All in all the reinsurers were pleased with the initial transactions, he continues. “To our knowledge reinsurers haven't invested in multifamily debt before,” he said.

How It Works

The covered loan pool for the transaction consists of 1,106 loans for 1,111 multifamily properties acquired by Fannie Mae from October 2017 through January 2018. Each loan has an unpaid principal balance of $30 million or less.

Fannie Mae will retain risk on the first 225 basis points of loss on the $11.1 billion covered pool of loans. Reinsurers will cover the next 150 basis points of loss. Once the pool has experienced 375 basis points of losses, the credit protection will be exhausted and Fannie Mae will be responsible for any further losses.

More Liquidity

Fannie Mae and its counterpart Freddie Mac have been using these structures to transfer credit risk off of their balance sheets. But the transactions will also benefit borrowers as they will introduce more liquidity from a new capital source in the market.

“The greater number of different sources of capital you can bring to the market introduces more resilience,” Gross says.