Building Resiliency and Planning for Post-Conservatorship CRT
Originally published on GlobalCapital.com
Mike Reynolds talks to Global Capital about Freddie Mac's CRT program
Freddie Mac’s single-family credit risk transfer program, including its STACR® (Structured Agency Credit Risk) offering, hit some key milestones in 2019. For one, the firm surpassed the $50 billion mark for total issuance since the inception of the program in 2013. Second, Freddie Mac introduced a REMIC structure, helping make CRT bonds more attractive to existing investors while appealing to new ones. With the U.S. housing market and macroeconomic environment continuing its strong performance, even in the late stages of the credit cycle, Freddie Mac experts see a lot of opportunity ahead for STACR. Mike Reynolds, vice president of single-family credit risk transfer, gives thoughts on the growth of the program in 2019 and expectations for the coming year.
- What were some of the highlights of Freddie Mac’s STACR program in 2019?
In 2019 we had a very robust execution in both our STACR and ACIS® (Agency Credit Insurance Structure) programs. Probably the biggest development in 2019 on the STACR side was that we started to issue REMICs, which has expanded investor appetite.
We also launched our data intelligence portal, Clarity, this year. Not only does Freddie Mac lead the industry in credit standards, but we also lead in data disclosures. However, for some of our investors, working with such large data sets can be cumbersome or costly if they have to outsource it to third parties. We developed the Clarity portal as a free tool on our website, allowing investors to look at transactional data across both STACR and ACIS platforms and easily analyze deals.
- With regards to the STACR program, could you talk about what you observed in the investor base in 2019 and how you expect it to evolve in 2020?
The REMIC structure generally makes STACR more appealing to REITs, and we saw interest from REITs investors in our first transaction, as well as some non-REIT entities—the favorable tax treatment being the big driver there. I would say overall, that the investor count was flat. A big factor is that spreads have decreased throughout the year, and some investors may be looking for minimum returns and finding those opportunities in other asset classes, and that is all just a natural part of the relative value picture.
Going into 2020, fundamentals for the fixed income market remain very attractive, specifically within the U.S. residential housing market. We are a consistent issuer in this space, and we are offering the ability to take down new paper where some other asset classes tied to legacy mortgages continue to shrink. Asset managers, hedge funds, REITs and insurance companies will look to this space as an opportunity. We’ve been printing our deals at historically tight levels, and we thinkthere is really strong demand for CRT, and I expect that to continue in 2020.
Some players who have been sitting on the sidelines should become more active in 2020, though I think most of the investors who are interested in the program are already participating. I also think there will be growth on both the reinsurance and capital markets sides. The bigger picture is that the capacity within our current investor base is very large, and we placed approximately $10 billion in 2019. In 2020, that number is expected to be in the $12-$16 billion range, and I believe the capacity to absorb that supply will be there.
- How has liquidity of CRT improved, and do you expect it to continue to deepen in the coming year?
We closely monitor liquidity, and a liquid secondary market for STACR is very important to us. We’ve had great success—average trading per month is $2.1 billion, up from $1.7 billion a year ago. In addition to the traditional STACR liquidity providers, two new broker dealers have recently entered the market. That is a very positive sign and helps investors get comfortable that there is a vibrant and liquid market available for them to buy or sell.
- Are there any structural changes or developments that Freddie Mac will make to the CRT program in the coming year?
Our number one goal is to prepare to exit conservatorship, and as the Federal Housing Finance Agency (FHFA) lays out those milestones, we will execute them in a safe and sound manner.
We do expect FHFA to propose new capital rules in 2020, and those rules may affect our credit risk transfer program. So, we will look at that and make any necessary changes. We will also continue to move away from LIBOR. The STACR program is currently a LIBOR-based structure, and we will work with the industry to migrate toward SOFR-based issuances. We’re also looking to reduce the amount of time between when we issue the MBS guarantee and when we issue CRT. We call that time period “the pipeline,” and we will focus on reducing our credit exposure there.
- Are STACR deals being issued with LIBOR fallback language currently?
The language in our most recent deals is similar to what is prescribed by the Alternative Reference Rates Committee (ARRC), in that we can move to an alternative index when the customary method to determine LIBOR is no longer viable. Incorporating the ARRC recommended fallback language will provide greater clarity to STACR investors and will be one of the steps we look to take in 2020. I expect Freddie Mac to make an announcement on when we plan to issue the first SOFR-based STACR deal in 2020.
- Can you talk about what you saw in 2019 with regards to housing fundamentals and how you see the sector developing over the course of 2020?
We think fundamentals are firm. We have historically low unemployment at 3.6%, inflation remains subdued, and our forecast for the mortgage rate at the end of 2019 is 3.8% and expected to remain low. This will lead to a surge of refinancings, which should continue into 2020. The performance of the credit markets is solid, and we have low delinquencies and net losses. The credit fundamentals are there and attractive, so we think the combination of increased refi volume and a reduced pipeline will bring higher volumes of CRT to the market in 2020.