The First GSE Risk-Sharing Deal: An Effective Risk Transfer Mechanism?

Abstract

The first government-sponsored enterprise (GSE) risk-sharing transaction, Freddie Mac’s STACR (Structured Agency Credit Risk) 2013-DN, in which private investors bear some of the credit risk, priced on July 23, 2013. These transactions were a cornerstone of the FHFA’s strategic plan. The thought was these transactions could be used not only to transfer risk but also to validate guarantee fee pricing. In this article, the authors first describe the transaction structure and collateral. They argue that with good quality collateral the default and losses will be low, at 66 basis points of default and about 10 basis points of loss in the Amherst base case. The authors then examine the risk–return on the securities themselves, arguing that the M-1 tranche is unlikely to ever take a loss. The M-2 tranche is more “cuspy” but has value at initial pricing levels. Finally, they investigate whether this transaction has been an effective risk transfer for Freddie Mac. The authors’ view is that it is generally very effective but provides insufficient protection in high-prepayment/high-default environments.