September 19th, 2017

Public Sector Risk Financing Perspectives in the United States: The Market for Mortgage Credit Risk (Re)insurance: Part II

Posted at 1:00 AM ET

krohn_jeff_photo_crop-sm2tedeschi_john_photo_sm21Jeffrey Krohn, Managing Director, and John Tedeschi, Managing Director

To date, the government sponsored entities (GSEs) have placed more than USD 10 billion of limit into the reinsurance market through Fannie Mae’s Credit Insurance Risk Transfer and Freddie Mac’s Agency Credit Insurance Structure, and over USD 50 billion of risk into the capital markets through Fannie Mae’s Connecticut Avenue Securities and Freddie Mac’s Structured Agency Credit Risk. Both capital market and reinsurance programs provide the GSEs with a form of excess of loss coverage on closed pools of mortgages meeting very strict guidelines.

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Fulfilling the Federal Housing Finance Agency (FHFA) mandate, the GSEs will continue to programmatically issue structured bonds and place (re)insurance to transfer risk to the private markets. As the Credit Risk Transfer program expands, the GSEs are seeking new counterparties to meet their massive needs for the U.S. housing market, the largest in the world.

As (re)insurers seek opportunities to grow profitably, the residential mortgage credit risk market provides portfolio diversification, healthy returns, and capital management benefits. The risk is uncorrelated to the majority of property and casualty lines of business, and (re)insurers may participate in layers of reinsurance that match their risk-return appetite.

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Rigorous standards, strong underwriting discipline, and standardization in all facets of the U.S. mortgage system have dramatically reduced credit risk. The macroeconomic forecast for this sector is positive because of the diversity of the U.S. economy, low interest rates, and limited housing supply. The GSEs are committed to a strong partnership with the debt and reinsurance markets.

Guy Carpenter provides guidance to clients around participation in mortgage credit risk transactions. We encourage clients and prospective clients to reach out to our team of specialists.

Link to Part I>>

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