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Freddie Mac Turns to Reinsurer to Increase Risk-Sharing Efforts

Freddie Mac bought insurance covering a portion of losses on a pool of home loans from Arch Capital Group Ltd. (ACGL)’s Arch Reinsurance Ltd. unit, expanding risk-sharing efforts by the government-backed company.

The policy will cover as much as $77.4 million of losses on a pool of mortgages funded in the third quarter of last year, McLean, Virginia-based Freddie Mac said today in an e-mailed statement. The loans are the same ones it shared some risk on through a new type of securities sold earlier this year, Kevin Palmer, a vice president of strategic credit costing and structuring, said in a telephone interview. The pool then included 96,000 of mortgages with $22.5 billion of balances.

Freddie Mac, which already relies on U.S. mortgage insurers to bear losses on loans with less than 20 percent down payments, stands to benefit by turning to global reinsurers for bulk policies because their diversified exposures will make them stronger counterparties during any future housing crisis, said Donna Corley, senior vice president of pricing and costing.

“It’s groundbreaking,” she said in a telephone interview. “It’s a huge source of capital and a different source of capital.”

The Federal Housing Finance Agency ordered Freddie Mac and Washington-based Fannie Mae (FNMA) to engage in risk-sharing transactions to gain insight into how the private sector prices for potential losses and to reduce taxpayers’ dangers. Deals were sought on at least $30 billion of loans each this year, according to the goals set by FHFA for executives at the firms, which back about two thirds of new U.S. mortgages.

New Securities

Freddie Mac sold $630 million of notes this month that share its risks on $35.3 billion of loans to about 50 investors, after placing $500 million in its inaugural July deal.

The company will pay 2.35 percent annually to Arch Reinsurance for protection equivalent to the safer slice of the first bond deal, Palmer said. It will pay 5.35 percent for protection similar to the riskier class, he said.

Fannie Mae sold $675 million of risk-sharing securities last month and earlier this year obtained insurance on a pool of about $5 billion of mortgages from NMI Holdings Inc. (NMIH)’s Emeryville, California-based National Mortgage Insurance Corp.

Arch Capital, a Bermuda-based insurer, announced plans in February to enter the U.S. market for mortgage insurance by adding assets from bankrupt insurer PMI Group Inc. in a $300 million deal. This month, rival Radian Group Inc. (RDN) accused Arch Capital in a lawsuit of inducing a former account manager to quit and take confidential information with her to gain a competitive edge when it enters the business.

Freddie Mac and Fannie Mae, which were seized by the government and bailed out during the 2008 financial crisis, are set to return $39 billion to the U.S Treasury after reporting third-quarter profits, bringing their total payments to within about $2 billion of the cash aid they got after the credit crisis. Freddie Mac’s latest dividend will leave taxpayers ahead by $9 million, according to a statement last week.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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