The regulator making most of the decisions for the two Government Sponsored Entities (GSE) released its outlook for 2018, and the credit risk transfer program will play a critical role.
The Federal Housing Finance Authority (FHFA) released its “2018 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions.”
FHFA expects the credit risk transfer program to continue in a robust manner.
“FHFA expects the Enterprises to continue single-family and multifamily credit risk transfers as core business practices. FHFA will adjust targets as necessary to reflect market conditions and economic considerations. FHFA expects the Enterprises to continue to refine and improve their credit risk transfer programs. FHFA expects the Enterprises to transfer a meaningful amount of credit risk and will publish in CRT progress reports the actual amount of credit risk transferred by each Enterprise.”
The CRT program has received a lot of attention recently. In early December, Dr. Michael Canter, the Director of US Multi-Sector and Securitized Assets, at Alliance Bernstein L.P, testified in front of the House Financial Services Committee on housing reform noting: “I view the process of Housing Finance reform as a continuum, noting that the Government Sponsored Enterprises that are at the center of the housing finance system and their regulator the Federal Housing Finance Agency [FHFA] have already made some progress in reforms post-crisis most notably through the introduction of the Credit Risk Transfer market. CRTs are debt issuances with payments linked to the credit performance of an underlying pool of loans, and they provide a layer of private capital as well as a source of market pricing of risk that the GSEs had lacked pre-crisis.”
The Congressional Budget Office (CBO). followed with a white paper concluding that the CRT market is fully functional.
What is CRT?
According to CBO, here’s what CRT’s do: “At the direction of FHFA, the GSEs began undertaking transactions in 2013 to transfer some of the credit risk of their guarantees to private investors.” The CBO stated. “In most of those transactions, the GSEs issue bonds, called credit-risk notes, that pay principal and interest to investors based on the performance of an underlying pool of mortgages guaranteed as part of traditional MBSs. Credit-risk notes insulate Fannie Mae and Freddie Mac from a specified amount of mortgage losses by having those losses reduce the amount of principal repaid to holders of the notes.
“The GSEs have also experimented with reducing their exposure to credit risk by issuing subordinate MBSs that they do not guarantee, by having mortgage originators retain some of the risk on the loans sold to the GSEs, and by purchasing reinsurance on pools of mortgages.”
Projections for 2018
The FHFA projections for single family CRTs
- Transfer a meaningful portion of credit risk on at least 90 percent of the unpaid principal balance (UPB) of newly acquired single-family mortgages in loan categories targeted for credit risk transfer, subject to FHFA target adjustments as may be necessary to reflect market conditions and economic considerations.
- For 2018, targeted single-family loan categories include: non-HARP, fixed-rate mortgages with terms greater than 20 years and loan-to-value (LTV) ratios above 60 percent. Additional information on CRT targeted loan categories is in Appendix B.
- Report to FHFA the actual amount of underlying mortgage credit risk transferred
- Transfer a meaningful portion of the credit risk on newly acquired mortgages, subject to FHFA target adjustments as may be necessary to reflect market conditions and economic considerations.
- Report to FHFA the actual amount of underlying mortgage credit risk transferred.
FHFA and the GSEs
The GSEs, Fannie Mae and Freddie Mac, are public trading companies which were creations of the government and with a public mandate. The underwrite and securitize baskets of loans.
The two took on billions in toxic loans and had to be put into government conservatorship after the 2008 financial crisis.
FHFA was also created in 2008 by the Housing and Economic Recovery Act of 2008, and FHFA; it was created to regulate the two GSE’s; indeed, on September 7, 2008, it was then FHFA Director James Lockhart who made the decision to put the two companies into receivership.
FHFA effectively must sign off on any major decision made by the two.