Special report US Mortgage Risk Transfer 2020 Sponsored by Hunton Andrews Kurth LLP has wide-ranging experience in Huntonthe representation Andrews Kurth of dealers, LLP has wide-ranginginitial purchasers experience and issuers in thein novel representation synthetic and of dealers, initialasset-backed purchasers credit and risk issuers intransfer novel synthetictransactions. and asset-backed credit risk transfer transactions. In connection with these representations, we provide clients with advice regarding evolving and improving their credit risk transfer strategies to best utilize the capital markets while satisfyingIn connection applicable with these regulatory representations, requirements we provideand their clients internal businesswith advice needs. regarding Hunton evolving Andrews and Kurth improving has been their active credit in risk the growingtransfer strategiescredit risk totransfer best utilize space the and capital has helped markets shape while the marketsatisfying with applicable representation regulatory on first requirements impression and deals. their internal business needs. Hunton Andrews Kurth has been active in the growing credit risk transfer space and has helped shape the market with representation on first impression deals. ©2020 Hunton Andrews Kurth LLP | HuntonAK.com 20083 ©2020 Hunton Andrews Kurth LLP | HuntonAK.com 20083 ©2020 Hunton Andrews Kurth LLP | HuntonAK.com 20083 US MRT Research Report CONTENTS CHAPTER ONE: ORIGINS page 05 FANNIE MAE CORPORATE STATEMENT page 06 CHAPTER TWO: NEW PROGRAMMES page 08 CHAPTER THREE: CAS AND STACR IN PRACTICE page 10 AON CORPORATE STATEMENT page 13 CHAPTER FOUR: INSURANCE page 14 CHAPTER FIVE: THE ILN MARKET page 18 CHAPTER SIX: PRIVATE DEAL POSSIBILITIES page 21 Author Simon Boughey HUNTON ANDREWS KURTH Editor Mark Pelham CORPORATE STATEMENT page 22 [email protected] Design and Production CHAPTER SEVEN: Andy Peat REMICS, EPMI AND IMAGIN page 24 [email protected] Managing Director CHAPTER EIGHT: John Owen Waller THE FUTURE OF CRT page 27 [email protected] Subscriptions Account Manager Jon Mitchell +44 (0)20 7061 6397 [email protected] Business Development Manager David Zaher +44 (0)20 7061 6334 [email protected] Published February 2020 © SCI. All rights reserved. Reproduction in any form is prohibited without the written permission of the publisher. ISSN: 2043-7900 Although every effort has been made to ensure the accuracy of the information contained in this publication, the publishers can accept no liabilities for inaccuracies that may appear. No statement made in this magazine is to be construed as a recommendation to buy or sell securities. The views expressed in this publication by external contributors are not necessarily those of the publisher. SCI is published by Cold Fountains Media. Analysis for the risk transfer community | structuredcreditinvestor.com/mrtreport2020/ 03 Fannie Mae is a trusted industry leader in mortgage financing. As one of America’s largest housing partners, Fannie Mae provides security and stabilityAs one of for America’s mortgage largest finance. housing We helppartners, power Fannie the U.S. Mae mortgage provides securitymarket and and fund morestability mortgages for mortgage than finance.any other company.We help power We providethe U.S. lenders mortgage with market the liquidity and fund they needmore tomortgages give homeowners, than any other homebuyers, company. and We renters provide across lenders the with country the liquidity access to they affordableneed to give financing. homeowners, Through homebuyers, our Single-Family and renters and across Multifamily the country business access segments, to weaffordable provided financing. over $650 billionThrough in liquidityour Single-Family to the U.S. and mortgage Multifamily market business in 2019. segments, we provided over $650 billion in liquidity to the U.S. mortgage market in 2019. Learn more www.fanniemae.com ©Learn Copyright more 2020 Fannie www.fanniemae.com Mae © Copyright 2020 Fannie Mae US MRT Research Report CHAPTER ONE: ORIGINS S government-sponsored US mortgage-related securities issuance enterprises (GSEs) have been intrinsically linked to 3,000 the secondary mortgage and mortgage-backed securities Agency (FHLMC, FNMA, GNMA) Non-agency (MBS) market from outset. They have been at 2,500 Uthe forefront of its development throughout the past eight decades and continue to lead 2,000 the way with new developments as well as providing the foundations and benchmark for all mortgage risk transfer (MRT) market 1,500 participants. US$ billions Chief among those participants are the two 1,000 principal federal housing finance agencies. The Federal National Mortgage Association – known as Fannie Mae – and the Federal Home Loan 500 Mortgage Corporation – Freddie Mac. Fannie Mae was established by the US 0 Congress in 1938 as part of President Franklin 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Delano Roosevelt’s New Deal. The organisa- Source: SIFMA tion’s purpose was to fund local banks through the creation of a liquid secondary mortgage market. In doing so, the agency not only saved the Depression-hit housing market and related construction industry, but also helped to usher in of a new principal player gave greater depth to the finance market participants they were badly hit a new generation of American home ownership, secondary mortgage market and enabled even by the global financial crisis. Resultant losses saw paving the way for banks to loan money to low- more funding to mortgage lenders in support of the two GSEs placed into conservatorship of the and middle-income buyers who otherwise might homeownership and rental housing. Federal Housing Finance Agency (FHFA) in not have been considered creditworthy. Around this time, securitisation was being September 2008. In 1968, Fannie Mae converted to a privately developed to assist in the GSEs’ aims and Since then, MBS markets have recovered an held corporation and two years later was allowed to broaden the scope of MRT. It was the Govern- even keel, activity has picked up in recent years invest in private mortgages in addition to the feder- ment National Mortgage Association (known as and existing holdings and new issuance have ally insured loans already within its remit. The same Ginnie Mae and formerly part of Fannie Mae pre- begun generating relative value once more. The year, 1970, saw the launch of Freddie Mac. privatisation) that guaranteed the first mortgage GSE case is no different in those respects but at Freddie’s statutory mission to provide liquidity, pass-through security of an approved lender in the same time they are also once again providing stability and affordability to the US housing mar- 1968. However, by 1971 Freddie Mac had issued revenue for the US tax payer as well as support- ket manifested itself in a similar model to Fannie’s its first securitisation and Fannie Mae joined it in ing the mortgage market. Today, Fannie Mae in that it too buys mortgages on the secondary 1981, still some way ahead of the private market. and Freddie Mac have each developed their own market, pools them, and sells them as MBS to Securitisation remains key to both GSEs’ MRT innovative issuance programmes of credit risk investors on the open market. The addition strategies, but like all other major structured transfer (CRT) products. Analysis for the risk transfer community | structuredcreditinvestor.com/mrtreport2020/ 05 Data Dynamics® Data Dynamics is Fannie Mae’s free data analytics web tool. The platform allows investors and reinsurers to interact with Credit Risk Transfer and analyze the historical loan performance data, deal As the largest credit risk manager in the mortgage industry, Fannie Mae employs prudent issuance data, and ongoing disclosure data that we make standards and advanced technologies to acquire quality loans, prevent defaults, and reduce available to support our credit risk transfer programs, losses. We continuously evolve our CRT programs to broaden the types of loans covered and Connecticut Avenue Securities® (CAS) and Credit Insurance promote growth in the credit risk transfer market. Through our suite of credit risk transfer vehicles, Risk Transfer™ (CIRT™). Notable features include ability to: book of business. • to outstanding deals. The goals and benefits • and performance. Protect U.S. taxpayers Reduce capital • through the development of broad and liquid through consistent and programmatic issuance that was previously used to cover markets for credit risk. of various credit risk sharing products. exposure on transferred risk. various loan and property characteristics. • Access monthly loan-level data in the ESMA-template format to comply with the new EU Securitization Regulation. • Allow mortgage real estate investment trust Minimize impact on borrowers, Create liquidity (REIT) participants to monitor recognition of renters, and lenders to help build a stronger REIT income for tax purposes (“Good REIT Income”). option for investors. Sign up for a free Data Dynamics account today: Investor resources fanniemae.com/DataDynamics Fannie Mae provides a variety of resources on our web pages to help promote better understanding of the credit performance of CAS Resources for EU Institutional Investors Fannie Mae mortgage loans and Fannie Mae provides institutional investors Resources cover: our approach to credit risk: located in the European Union with • Article