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Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules Insurance accounting treatment aligns the timing of the recognition of credit losses with CRT loss recoveries. Under the previous corporate debt structure, there was a significant timing mismatch between the recognition of losses and recoveries as the CRT benefit could not be recognized until the underlying delinquent mortgage loan had progressed through the often-lengthy disposition process.
In addition, both Fannie Mae and Freddie Mac now engage in CRT
offerings under which the securities are issued by a third-party bankruptcyremote trust that also qualifies as a Real Estate Mortgage Investment Conduit REMIC. The transition of the capital markets CRT programs to the REMIC
Trust structure was a collaborative, long-term effort between Fannie Mae, Freddie Mac, and FHFA. The REMIC
Trust structure, like the trust structure described above, eliminates accounting mismatches associated with prior direct debt issuance transactions and limits investor exposure to Enterprise counterparty risk. Additionally, the REMIC structure is often more attractive to domestic Real Estate Investment Trusts REITs and foreign investors.
After exceptionally strong issuance volume between 2013 and the first quarter of 2020, neither Enterprise entered into new CRT transactions in the second quarter of 2020 due to the adverse market conditions stemming from the COVID19 pandemic.
However, Freddie Mac returned to the CRT capital markets and insurance/
reinsurance market during the third quarter of 2020, executing nine transactions in the second half of the year. In contrast, and despite improved market conditions, Fannie Mae continued to pause issuance of new CRT
transactions to evaluate the costs and benefits of CRT, including the capital relief provided by the transactions and the market conditions, as well as their overall capital requirements, risk appetite, and business plan.12 Overall, while down from its peak in 2019, total CRT volume in 2020 remained strong and exceeded 2018 volume despite the extreme and unforeseen difficulties arising from the COVID19 pandemic.
In 2021, both Enterprises are considering potential changes to their CRT programs to optimize risk transfer and capital relief under the ERCF.
Multifamily CRT
Even before the formalization of the single-family CRT programs, risk transfer to the private sector had long 12 https www.fanniemae.com/media/40576/
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been an integral part of the multifamily business models at the Enterprises.
Freddie Mac has traditionally focused on senior/subordinate structures via capital market transactions largely through its K-Deal platform. Fannie Mae has traditionally focused on pro-rata risk sharing directly with lenders through its Delegated Underwriting and Servicing DUS program. As the singlefamily CRT programs evolved and grew, the Enterprises worked to expand their existing multifamily risk transfer models to include structures similar to those of the single-family businesses.
Fannie Mae issued its first multifamily reinsurance transaction in 2016, the Multifamily Credit Insurance Risk Transfer MCIRT, which was based on the framework of the existing single-family reinsurance CIRT
transactions, where the Enterprise purchases insurance coverage underwritten by a group of insurers/
reinsurers. Fannie Mae uses MCIRT to transfer credit risk on multifamily loan acquisitions with up to $30 million in UPB. Since the first transaction in 2016, Fannie Maes MCIRT has become programmatic with a total of eight transactions executed. These transactions provide combined RIF of $1.9 billion on a total of $81 billion as measured at time of deal inception of Fannie Maes multifamily loan acquisitions.
In 2018, Freddie Mac introduced its Multifamily Credit Insurance Pool MCIP program to transfer additional credit risk on its multifamily loan acquisitions to the reinsurance market.
In the MCIP structure, as in Fannie Maes MCIRT program, Freddie Mac purchases insurance coverage underwritten by a group of insurers/
reinsurers that generally provide first loss and/or mezzanine loss credit protection. These transactions are also similar in structure to the single-family ACIS transactions.
In 2019, Fannie Mae expanded its multifamily CRT program by executing its first Multifamily Connecticut Avenue Securities MCAS CRT transaction which is based on the framework for Fannie Maes existing single-family CAS
execution. Fannie Mae uses MCAS to transfer credit risk on multifamily loans with UPBs greater than $30 million.
However, this new product allowed Fannie Mae to reach a multifamily CRT
investor base outside of the reinsurance industry. Fannie Mae has executed a total of two MCAS transactions which provide combined RIF of $0.9 billion on a total of $29 billion as measured at time of deal inception of Fannie Maes multifamily loan acquisitions.

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Freddie Macs multifamily capital markets CRT program began with the issuance of three fixed-rate Multifamily Structured Credit Risk MSCR notes in 2016 and 2017 as a separate offering from the K-deal program. These legacy MSCR notes use a fixed severity structure like early single-family CRTs and are unsecured and unguaranteed corporate debt obligations that transfer to third parties a portion of the credit risk of the multifamily loans underlying certain consolidated other securitizations and other mortgagerelated guarantees. SCR Notes are synthetic instruments whose cash flows are driven by the performance of a pool of multifamily reference obligations, instead of actual collateral tied to a trust in a typical securitization such as KDeals. In 2021, Freddie Macs MSCR
program transitioned to an actual loss/
Trust structure, and coupon payments are now floating rate, indexed to the Secured Overnight Financing Rate SOFR. These features align with the current single-family STACR CRT
product.
CRT in the ERCF
The Enterprises manage mortgage credit risk through their underwriting systems, guarantee fee revenues, and CRT programs. The ERCF reflects the Enterprises management of mortgage credit risk by allowing the Enterprises to reduce their credit risk-weighted assets for eligible CRT. However, the ERCFs treatment of CRT includes various components that limit the amount of capital relief provided by CRTs to ensure that all exposures retained by an Enterprise are meaningfully capitalized.
Dollar-for-dollar capital relief should not be expected given that CRT
transactions introduce counterparty and structural risk, and CRT has not yet been tested through a full economic cycle.
Under the ERCF, an Enterprise determines the capital treatment for eligible CRT by assigning risk weights to retained CRT exposures. The rule includes: i Operational criteria to mitigate the risk that the terms or structure of the CRT would not be effective in transferring credit risk; ii a tranche-specific prudential risk weight floor of 10 percent; and iii adjustments to reflect loss sharing effectiveness, losstiming effectiveness, and a dynamic overall effectiveness adjustment meant to capture the differences between CRT
and regulatory capital.
The operational criteria, risk weight floor, and effectiveness adjustments limit capital relief from CRT. The operational criteria act as a gateway by setting minimum criteria for potential
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