[Update 1: An earlier version of this article stated Senator Mike Crapo was from Indiana. It is now corrected to say Idaho.]

A bipartisan group of Senate Banking Committee members wrote a letter urging the Federal Housing Finance Agency to expand and better define the development of the Credit Risk Transfer programs, which shift credit risk from Fannie Mae and Freddie Mac to the private sector.

Together, U.S. Sens. Mark R. Warner, D-Va., Bob Corker, R-Tenn., Heidi Heitkamp, D-N.D., Mike Crapo, R-Id., Jon Tester, D-Mont. and Dean Heller, R-Nev., sent the letter to FHFA Director Mel Watt, outlining five steps he needs to take to bring transparency to the secondary mortgage market.

The letter begins by saying, “We are writing regarding the credit risk transfers currently being carried out by Fannie Mae and Freddie Mac. We supported the direction of the risk sharing language within Title VII of The Financial Regulatory Improvement Act of 2015, and we strongly support the expansion of these transactions, given they provide a vehicle for moving the government out of the first loss position and inform the process for policymakers looking to invite greater private capital into the market.”  

“The credit risk transfers are a vehicle for moving the housing market forward by attracting private sector investors, improving access to credit, and reducing taxpayer risk. As such, we ask that you prioritize work with the Enterprises on transactions designed specifically to push out first loss credit risk to the market, and to encourage transparency for investors and the public so that we can all better judge how these transactions impact returns to the Enterprises, costs to the taxpayer, and effects to the health of the broader housing finance system,” the letter stated.

Sen. Warner, who spearheaded today’s letter, is also a sponsor of one of the top reform packages floating around Capitol Hill, S.1217, the Housing Finance Reform and Tax Payer Act.

According to the Structured Finance Industry Group, the act sets the agenda to unwind Fannie’s and Freddie’s involvement in the secondary mortgage market, expand the role of private mortgage insurance and create a single government backstop through the Federal Mortgage Insurance Corporation to provide for common securitization platform and catastrophic mortgage insurance for qualified mortgage backed securities.

The letter requested the FHFA to accomplish the steps below:

  1. Credit Risk Transfer Goals: Provide a description of the new credit risk sharing pilot programs that FHFA intends to roll out over the next five years and steps the FHFA intends to take to solicit new ideas for new and innovative ways to lay off first loss and front-end credit risk, transferring credit risk away from the Enterprises and the taxpayers. Please include a description of steps FHFA intends to take to ensure its credit risk transfer goals can be met throughout the credit cycle. 
  2. Mortgage Insurance Transactions: Provide a description of how FHFA intends to move forward with mortgage insurance-focused transactions following the recently finalized mortgage insurance master policy requirements and Private Mortgage Insurer Eligibility Requirements (PMIERs).
  3. Transparency: Describe the amount of credit risk that has been transferred from the Enterprises on an annual basis. Explain how FHFA intends to better incorporate actual loss-based risk transfers rather than relying on fixed loss calculations.
  4. Expanding the Investor Base: Provide a description of steps FHFA intends to take to broaden the eligible investor base for credit risk transfer programs.
  5. Provide a list of any suggested legislative text that you believe would help facilitate any of these objectives above. 

A full copy of the letter can be found here