Freddie Mac invests in stronger credit risk policies

Freddie Mac Risk Management

The Wall Street Journal reports that mortgage giant Freddie Mac has taken steps to reduce taxpayers’ exposure to credit risk in the residential mortgage market.

Through Freddie Mac’s Agency Credit Insurance Structure, which allows for the sharing of credit risk with private investors, Freddie Mac was able to cover up to a combined maximum loss of $285 million relating to a pool of single-family loans.

This move marks the third time Freddie Mac has exercised the option since November 2013. The agency has made public its goal to expand risk sharing with private firms to reduce taxpayers’ exposure to mortgage losses.

“We’ve been gaining quite a bit of traction in the market,” Jeff Shue, a director working on the deals, told Bloomberg in a telephone interview. “We’ve got some new players involved in this transaction, and they’ve indicated interest in participating on a consistent basis. We feel confident we will see them again.”

The agency has not released the names of the four companies that are sharing the credit risk, “to be consistent with the standards in the market,” Shue explained.

According to the source, the sales of risk-sharing bonds and the purchase of new insurance policies have cut Freddie Mac’s exposure to losses on more than $100 billion of mortgages in the last year.

As of the moment, investor demand remains high for involvement in Freddie Mac’s risk sharing programs, but economists at Bloomberg question how long this demand will last.

Freddie Mac’s risk management policies will continue to have far-reaching effects on the mortgage industry, as well as the economy as a whole. Both Freddie Mac and Fannie Mae rely on insurers to minimize risk on loans with less than 20 percent down payments. However, there are other ways for financial institutions to manage credit risk. If the proper decision intelligence is applied during the application process, lenders can effectively mitigate risk by ensuring that borrowers meet minimum standards for creditworthiness.

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