A program to move risk in mortgage backed securities from the taxpayer to the private market has reduced US taxpayer’s risk exposure by 11%.
That was the determination of a new analysis by the Congressional Budget Office (CBO) of the credit risk transfer (CRT) program of Fannie Mae and Freddie Mac, the government sponsored entities (GSEs), which securitize mortgages.
“CRT transactions reduce the GSEs’ exposure to risk by 11 percent of the total risk exposure from the loan guarantees they made in 2018, CBO estimates.”
The GSEs bundle pools of American real estate mortgages together and turn them into bonds, known as securitization; those bonds are then traded on the open market, though they are traded over the counter with market makers, and very specialized traders.
The GSEs were leaders in irresponsible loans in the build up to the financial crisis, leading these bonds to become “toxic.”
The GSEs were listed on the NYSE but had to be bailed out by the federal government; they have since been delisted, trade over the counter, and are currently in the receivership of the government and thereby the taxpayer.
The CRT program is one of many- with varying success- to extract taxpayers from the two and return them to the private market.
The Federal Housing Finance Authority (FHFA), which regulates the GSEs, defined CRTs this way: “In 2012, the Federal Housing Finance Agency (FHFA) initiated development of a credit risk transfer program intended to reduce Fannie Mae’s and Freddie Mac’s (the Enterprises’) overall risk and, therefore, the risk they pose to taxpayers while in conservatorship. Fannie Mae and Freddie Mac implemented their credit risk transfer programs in 2013 and now transfer to private investors a substantial amount of the credit risk the Enterprises assume in targeted loan acquisitions. The programs include credit risk transfers via debt issuances, insurance/reinsurance transactions, senior-subordinate securitizations, and a variety of lender collateralized recourse transactions. As outlined in the annual Scorecard, the Enterprises continue to innovate and experiment with different structures and the scope of credit risk transfer as part of their efforts to reduce even more risk, where economically sensible.”
The CBO analysis four factors account for the amount of risk exposure still retained by the GSEs.
- Some loans are not expected to meet the GSEs’ target for CRT inclusion.
- CRT notes have shorter maturities than mortgages.
- Repayments of principal reduce CRT loss absorption.
- Some losses are not transferred to investors.
You can review the full report here: Credit Risk Transfer and De facto GSE Reform