Sen. Mike Rounds, Chairman of the Senate Banking Subcommittee on Securities, Insurance, and Investment; and Rep. Mike Flood, Chairman of the House Financial Services Subcommittee on Housing and Insurance, have sent a bicameral letter to Federal Housing Finance Agency (FHFA) Director William Pulte commending his commitment to credit risk transfer (CRT) programs at Fannie Mae and Freddie Mac and encouraging support of polices that leverage private capital to promote safety and soundness.
Starting in 2012 and introduced as a mechanism to limit exposure to potential mortgage credit losses, the FHFA, as conservator and regulator to Fannie Mae and Freddie Mac, set a strategic objective to share mortgage credit risk with private investors. Sharing credit risk with private investors was deemed the best option to minimize future risk for taxpayers, given the conservatorship of the entities. This is referred to as credit risk transfer (CRT). Freddie Mac and Fannie Mae subsequently created the government-sponsored enterprise (GSE) CRT market by issuing Structured Agency Credit Risk (STACR) and Connecticut Avenue Securities (CAS) bonds and purchasing reinsurance through the Agency Credit Insurance Structure (ACIS) and Credit Insurance Risk Transfer (CIRT) programs (STACR and ACIS are Freddie Mac’s programs and CAS and CIRT are Fannie Mae’s programs).
“Housing affordability and system stability are top priorities for Americans today. De-concentrating mortgage credit risk away from the government to willing private sector participants through CRT can promote both of those goals. CRT has and continues to hold great potential in helping to right-size the role the Enterprises play in our housing finance system,” wrote Sen. Rounds and Rep. Flood in the letter. “President Trump has directed federal agencies to lower housing costs and expand supply—goals that align directly with an improved Enterprise CRT program. As you chart FHFA’s course, we encourage you to support policies that leverage private capital and market discipline to promote safety, soundness, and liquidity through all economic cycles.”
Since 2013, CRT has played a significant role in shifting mortgage credit risk from the federal government to private investors, transferring $210 billion of risk across more than $6.7 trillion in mortgages. This letter builds on Sen. Rounds’ longstanding support for the strategic use of CRT programs to safeguard taxpayers. He previously raised the importance of CRT during Director Pulte’s confirmation hearing in February, highlighting it as a key tool.
“As we work to strengthen and modernize our housing finance framework, it is critical that the Enterprises operate on a foundation of financial discipline and stability,” said the letter. “That means reducing taxpayer exposure, encouraging market oversight, and maintaining affordable mortgage access for families across the country.
In January 2020, Donald Layton, former CEO of Freddie Mac from May 2012 until June 2019, and a Senior Industry Fellow at the Joint Center for Housing Studies Harvard University from 2020-2022 authored a report titled “Demystifying GSE Credit Risk Transfer: Part I–What Problems Are We Trying to Solve?” Layton, with more than 40 years of experience in financial services and as a corporate leader, worked for nearly 30 years at JPMorgan Chase and its predecessors, starting out as a trainee and retiring in 2004 as Vice Chairman and one of its top three executives.
In “Demystifying GSE Credit Risk Transfer: Part I–What Problems Are We Trying to Solve?”, Layton addresses five problems that the GSEs are trying to “solve,” or reduce, by embracing CRT as a core part of their business model, including:
- Can systemic risk be reduced?
- Can taxpayer exposure be reduced?
- Can GSE credit risk become subject to market discipline?
- Can GSE capital cost be reduced?
- Can guarantee fees be lower … without subsidy?
“Housing affordability and system stability are top priorities for Americans today,” said Sen. Rounds and Rep. Flood in their letter. “De-concentrating mortgage credit risk away from the government to willing private sector participants through CRT can promote both of those goals. CRT has and continues to hold great potential in helping to right-size the role the Enterprises play in our housing finance system. By strengthening and improving how Fannie Mae and Freddie Mac use CRT, we can advance a market-driven approach to housing finance reform—broadening mortgage access, reinforcing market stability, and protecting taxpayers from lending risks.”
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