Originally published on TheInsurer.com

Mike Reynolds Talks to The Insurer about Freddie Mac's CRT Program

1. Can you share a bit about your background and vision for Freddie Mac credit risk transfer?

I have been in the U.S. mortgage industry for more than 25 years and joined Freddie Mac in 2012 with the goal of launching our Single-Family CRT program. Over the past seven years we have evolved CRT from an idea to an industry leading mortgage asset class. While my specialty is the securitization side, my role expanded this spring to include the (re)insurance program, which was a natural fit. It has allowed us to align strategies between the two programs and create efficiencies that help us to be nimbler and more competitive in the market. My vision for the business is to continue to evolve our product offerings to appeal to a wide variety of investors and (re)insurers, while reducing credit risk exposure of U.S. taxpayers and Freddie Mac.

2. How has CRT come to be a core business strategy for Freddie Mac?

Our traditional business strategy involves purchasing residential mortgage loans and issuing guaranteed securities, transferring interest-rate risk to investors but retaining the credit risk on our portfolio. We introduced our flagship CRT offerings Structured Agency Credit Risk (STACR®) and Agency Credit Insurance Structure (ACIS®) to transfer a portion of that retained credit risk to private investors while still maintaining skin in the game. In changing our credit risk strategy from “buy-and-hold” to “buy-and-transfer,” we’ve created a more sustainable business model that is more resilient to economic downturns. Since inception, we have transferred $50 billion in risk to investors and (re)insurers, credit protecting $1.3 trillion in Single-Family mortgages.


3. In what ways have U.S. lending practices evolved in the past decade?

Freddie Mac sets the industry standard for post-recession loan manufacturing and credit quality standards. Through our comprehensive underwriting standards requiring full documentation, a rigorous quality control process, commitment to our seller/servicer relationships and credit risk management practices, Freddie Mac has redefined U.S. housing credit worthiness. Investments in the right technology, like Freddie Mac Loan AdvisorSM solution, provides greater certainty earlier on in the underwriting process along with other efficiencies. Loans in STACR® or ACIS® transactions go through an additional due diligence review, and any loans that don’t meet the eligibility requirements are excluded.

4. How has performance been for the ACIS program?

Since program inception in 2013, we have successfully executed 49 ACIS transactions covering over $13 billion in policy coverage across 38 unique (re)insurers. Since 2015, we have averaged $2.5 billion to $3 billion in (re)insurance contracts per year. ACIS has outperformed expectations with a total program cumulative loss of 1.2 basis points.

5. Do European (re)insurers participate in ACIS transactions?

Yes, we have a geographically diverse group of (re)insurers and (re)insurance panels that participate in our program. Over 60% of ACIS participants are non-U.S. domiciled. Additionally, our credit tranches offer (re)insurers different risk/return profiles.

6. What are your thoughts on the current U.S. residential mortgage market?

Sales are gaining momentum, and low mortgage rates amidst a strong labor market should support continued improvement. Home-price growth is currently trending around 3% but is expected to slow next year. Our first-time home-buyer share is over 45%, the highest on record, largely from millennials between the ages of 26 and 28. Peak first-time homeownership usually occurs among people in their early-to-mid thirties, signaling—from a demographic perspective—firm demand for the purchase market into the next decade.