AM Best Released a newly updated table of net capital charges associated with a representative sample of mortgage-related transactions from Fannie Mae and Freddie Mac’s Credit Risk Transfer (CRT) programs — Freddie Mac’s Agency Credit Insurance Structure (ACIS) and Fannie Mae’s Credit Insurance Risk Transfer (CIRT). These tables also highlight some of the key components of the factor-based method used to calculate the net capital charge in the Best’s Capital Adequacy Ratio (BCAR) model.
The net capital cost for CRT transactions is expressed as B5.meters—Mortgage-related net losses and LAE reserve risk—In the net required capital formula that is part of BCAR. It is based on unexpected losses and premiums associated with the trade and is represented as part of the original exposure.For this reason best feature“Updates to the Net Capital Charge Tables for ACIS/CIRT Reinsurance Transactions,” the seventh table on Net Capital Charges, AM Best selected about half of the 141 CRT transactions.
Despite a sharp drop in delinquency rates across the country over the past few months, a small number of trades remained under the trigger event due to failing the delinquency test, leaving principal in junior tranches, according to the report. is not assigned. This does not affect AM Best’s net capital cost calculation. This calculation assumes a stress scenario where each transaction has a triggering event.
The report also notes that the ultimate impact of the pandemic on ACIS/CIRT trades remains unknown as some borrowers’ tolerance is not yet over. Forgiveness, loan modifications and moratoriums on foreclosures have slowed the rate at which these trades incur losses in the pool. At the very least, the leniency has delayed the realization of losses due to the time required to go through the foreclosure process after the maximum grace period has expired.
AM Best publishes these net capital charges on a semi-annual basis using the most recent performance data available from government sponsored corporate websites. Future publications of net capital cost will depend, among other factors, on the continued availability of data from Fannie Mae and Freddie Mac in a timely manner.
To access a full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=322667.
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Source: AM Best