Bond investors concerned about Freddie Mac "Deep MI" credit risk-sharing program

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Some bond investors are raising questions about the new credit risk-sharing pilot program from Freddie Mac that shifts additional credit risk away from the government-sponsored enterprise to private mortgage insurance companies, according to a report from Bloomberg.

The Bloomberg report, written by Matt Scully and Joe Light, states that the Securities Industry and Financial Markets Association and others are concerned by the risks that the “Deep MI” risk-sharing program carries.

From Bloomberg:

The money managers have raised concerns about pilot programs by the two U.S.-controlled mortgage companies to share more risk with the guarantors, and are pressing trade groups to lobby against components of the plans. They say mortgage insurers have a history of failing during downturns, and that the industry might not be strong enough to withstand future calamities. The programs also could cut into supply for a relatively new type of bond that Fannie Mae and Freddie Mac issue, they say.

“Why would Fannie and Freddie want to be more exposed to mortgage insurers? It isn’t a dependable source of insurance, and I question their ability and willingness to pay claims during a crisis,” said Michael Canter, who oversees securitized assets at AllianceBernstein in New York.

Scully and Light’s article also notes some investor concern that shifting more risk to mortgage insurers could lead to fewer risk-sharing deals for the GSE.

Again from Bloomberg:

“We want to continue to grow credit risk-transfer structures” in the bond markets, said Dave Lyle, who oversees residential mortgage investment strategies at Invesco Mortgage Capital Inc.

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