Mortgage credit risk concentration is getting worse, not better, according to an NYU Furman Center blog.
The government took several steps to avoid such concentration following the 2008 Great Financial Crisis, however the two Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, were largely exempted from those changes, despite their contribution to the financial crisis.
They weren’t subject to some of the new rules because the plan was for them to be wound down and replaced, according to the blog. However, there has still been no replacement for the GSEs. The latest discussion centers around privatizing the GSEs, but to date, no definitive plan has emerged.
According to a Federal Reserve Bank of Philadelphia study, the privatization of the GSEs could help alleviate the concentration of risk.
The GSEs are the largest source of American residential mortgage credit for the foreseeable future, the blog noted. As a result, the concentrated risk issue hasn’t waned, despite an effort to do so with credit risk transfers that started in 2013.
Restoring the CRT Program
However, the Federal Housing Finance Authority started de-emphasizing the program in mid-2019, with less and less credit being transferred out.
The blog urges the FHFA to once again focus on significantly reducing the excessive concentration of mortgage credit risk at the GSEs by restoring the strong, comprehensive CRT program that existed from 2013 to 2019. If the FHFA is unwilling to do this on its own, the Financial Stability Oversight Council (FSOC), established after the GFC to address just such issues, should leverage its influence and authority to help the FHFA recognize the importance of doing so.
“This is a tremendous source of potential financial instability and systemic risk if ever there was one,” the blog says. “Looking back, it was large losses on their mortgage assets and guarantees, and the likelihood of more to come, combined with their historic severe undercapitalization, that caused their near-failure in 2008 when the market lost confidence in them.”
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