|FEDERAL NATIONAL MORTGAGE ASSOCIATION FANNIE MAE filed this Form 10-Q on 05/07/2015|
Table 24: Representation and Warranty Status of Single-Family Conventional Loans Acquired in 2013-2015
As of March 31, 2015, approximately 19% of loans acquired under the new representation and warranty framework had obtained relief. Providing lenders with relief from repurchasing loans for breaches of certain representations and warranties on loans acquired beginning in 2013 that meet specified eligibility requirements shifts some of the risk of non-compliance with our requirements back to us. However, we believe that we have taken appropriate steps to mitigate this risk, including moving the primary focus of our quality control reviews to shortly after the time the loans are delivered to us. We also retain the right to review any defaulted loans that were not previously reviewed and have not obtained relief, in addition to retaining the right to review all loans for any violations of life of loan representations and warranties.
FHFA’s 2015 conservatorship scorecard includes an objective to transact credit risk transfers on single-family mortgages with at least $150 billion of unpaid principal balance, adjusted for the amount of credit risk transferred. In meeting this objective, we must utilize at least two types of risk transfer structures. Our primary method of achieving this objective has been through the issuance of CAS, which transfers some of the credit risk associated with losses on the underlying mortgage loans to investors in these securities. During the first quarter of 2015, we issued $1.5 billion in CAS, transferring some of the credit risk on single-family mortgages with an unpaid principal balance of $50.2 billion.
In a CAS transaction, we create a reference pool consisting of recently acquired single-family mortgage loans included in our single-family guaranty book of business in our condensed consolidated balance sheet. We then create a hypothetical securitization structure with notional credit risk positions, or tranches (that is, first loss, mezzanine and senior). We receive cash and issue CAS (which relate to the mezzanine loss position) to investors, which we recognize as “Debt of Fannie Mae” in our condensed consolidated balance sheets.
We are obligated to make payments of principal and interest on the CAS, and we recognize the interest paid as “Long-term debt interest expense” in our condensed consolidated statements of operations and comprehensive income. The principal balance of the CAS is reduced as a result of principal liquidations of loans in the reference pool or when certain specified credit events (such as a loan becoming 180 days delinquent) occur on the loans in the reference pool. In turn, these credit events may reduce the total amount of payments we ultimately make on the CAS. However, principal reductions will first occur on the first loss position, which is retained by us, until it is fully reduced before the CAS begin participating in reductions to the principal balances. As the reference pools underlying CAS issued to date consist of recently acquired single-family mortgage loans (loans in the reference pools underlying the transactions in the first quarter of 2015 were acquired between September and November 2013), we have recognized minimal credit losses on loans in these reference pools to date.