Special Report from Best: AM Best Updates Net Capital Charge Associated with Fannie-Freddie Mortgage Risk Transfers
OLDWICK, NJ–(BUSINESS WIRE)–AM Best updated tables of net capital charges associated with a representative sample of credit risk transfer (CRT) mortgage transactions from Fannie Mae and Freddie Mac, the credit insurance structure of Freddie Mac’s Agency (ACIS) and Fannie Mae’s Credit Insurance Risk Transfer (CIRT). These tables also highlight some of the key elements of the factor method used to calculate net capital charges in Best’s Capital Adequacy Ratio (BCAR) model.
The net capital charge of CRT transactions is represented by B5m—Net Mortgage Loss and LAE Reserves Risk—in the net required capital formula which is part of the BCAR. It is based on unexpected losses and premiums associated with transactions and is represented as a fraction of initial exposures. For that Best Special Report“Updated Net Capital Charge Tables for ACIS/CIRT Reinsurance Transactions”, the sixth on net capital charges, AM Best selected approximately half of the 127 CRT transactions in effect through December 2021 to calculate the net capital charges associated with individual layers of CRT transactions.
According to the report, some of these transactions remain subject to trigger events caused by the high delinquency rates caused by the COVID-19 pandemic, resulting in no principal being allocated to junior tranches. This will not affect AM Best’s net capital charge calculation, as the calculation assumes stress scenarios with trigger events in place for each transaction.
The report also notes that the ultimate effect of the pandemic on ACIS/CIRT transactions should become more apparent over the coming year, now that the forbearance period is over. Forbearance, loan modifications and foreclosure moratoriums have slowed the rate at which losses in the pools of these transactions are growing. At the very least, the forbearance delayed the realization of the losses simply because of the time it took to go through the foreclosure process after the maximum forbearance period expired.
AM Best publishes these net capital requirement charts semi-annually, using the most recent performance data available from government-sponsored company websites. Future releases of net capital charges will depend on the continued and timely availability of data from Fannie Mae and Freddie Mac, among other factors.
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=317233.
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in more than 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.
Copyright © 2022 by AM Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED.