Mortgage giant Freddie Mac is offsetting loan risks for the first time by tapping the reinsurance industry to cover potential losses on loans it guarantees, The Wall Street Journal reported. The move is a way to share risk with private investors.
Reinsurance is purchased by an insurance company from one or more other insurance companies as a means of risk management.
Freddie Mac, a government-controlled entity, announced this week that it purchased an insurance policy from a reinsurance unit of Arch Capital Group Ltd. The policy will cover up to $77.4 million in credit losses on a pool of loans that Freddie acquired in the third quarter of 2012.
Freddie’s new focus on the reinsurance industry is a way to increase more private investors in the mortgage market and reduce potential risks to taxpayers, according to the Journal. The Federal Housing Finance Agency, which oversees Freddie and Fannie Mae, has mandated that the two companies find multiple types of investors to share the risks in protecting against potential home owner defaults.
In a similar transaction in October, Fannie Mae teamed with National Mortgage Insurance Corp. to cover a pool of $5 billion in home loans.