GSE Purchases Insurance to Encourage Private Market Participation

In an effort to mitigate potential losses incurred by a questionable pool of single-family loans, Freddie Macannounced Tuesday that it has obtained an insurance policy underwritten by Arch Reinsurance Ltd. The policy will cover up to $77.4 million of credit losses for a portion of the credit risk associated with a pool of single-family loans funded in the third quarter of 2012, and is in line with the GSE’s goal of sharing credit risk with the private market.

This new insurance coverage is intended to attract new sources of private capital from non-mortgage guaranty insurers and reinsurers interested in assuming a portion of the credit risk on specified portions of Freddie Mac’s high-quality single-family mortgage loan portfolio.

“This is part of our business strategy to expand risk-sharing with private firms, thus reducing taxpayers’ exposure to losses from mortgage foreclosures,” said David Lowman, EVP of single-family business for Freddie Mac. “We have brought to the market new sources of capital for transferring mortgage credit risk away from taxpayers. We’ve tapped into the global insurance community’s appetite for U.S. mortgage credit exposure, and would like to do more of these policies in the future.”

This year Freddie Mac introduced new risk sharing initiatives with two STACR debt offerings and credit insurance. STACR debt notes were among the largest credit security offerings in the market.

The credit risk initiatives support the Federal Housing Finance Agency’s (FHFA) goals for the GSEs to demonstrate the viability of multiple types of risk transfer transactions involving single-family mortgages.

“The completion of this deal is unique in that it is with a diversified non-mortgage insurer and it demonstrates yet another approach to risk sharing with investors,” said Edward DeMarco, acting director of FHFA. “The transaction supports FHFA’s 2013 conservatorship scorecard and FHFA’s strategic plan for the enterprise conservatorships, reducing Freddie Mac’s market footprint and ultimately protecting taxpayers.”


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