CRT is ‘responsible’ hedge against taxpayer risk: FHFA’s Thompson

Fannie Mae echoes Thompson’s view with its latest CRT deal, which transfers to the private sector a portion of the risk on a $25B loan pool


Fannie Mae is unveiling its sixth Connecticut Avenue Series (CAS) credit-risk transfer deal of 2022, a $754.4 million note offering backed by a reference pool of single-family mortgages valued at $25 billion.

The offering is slated to close June 10, according to a presale review by the Kroll Bond Rating Agency (KBRA). The latest transaction, CAS 2022-R06, involves a reference pool of 83,420 single-family mortgage loans. 

The states with the largest concentrations of mortgages in the reference loan pool for the credit-risk transfer (CRT) offering are California, 18.4%; Florida, 7.1%; Texas, 6.6%; Washington, 4.7%; and New York, 4.1%, according to KBRA. The leading originators for the loans in the offering and the percentage of loans originated in the reference pool are Rocket Mortgage, 10%; United Wholesale Mortgage, 8.8%; Pennymac, 5.7%; and Wells Fargo, 4.3%.

This latest credit-risk transfer deal comes on the heels of new capital rules recently taking effect for the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. One part of the change impacting CRT deals reversed rules adopted by the Federal Housing Finance Administration (FHFA) during the Trump administration. The Trump-era regulations made capital treatment for CRT deals unattractive, which contributed to Fannie’s decision to pause its CRT offerings for a year and a half.

In comments made at a recent Mortgage Bankers Association (MBA) convention in New York, Sandra Thompson, the newly confirmed director of the FHFA, made clear that CRT deals will be deemed a critically important part of the GSEs strategy under her oversight. 

“I wanted to make sure that we got our capital treatment for CRT right, so we issued, or we re-proposed … aspects of the [overall] capital rule,” Thompson said at the MBA event. “We made a change, and now the capital rule for the enterprises has favorable treatment of CRT, which we think is the right way to go because Fannie Mae and Freddie Mac are the largest owners of credit risk.”

Thompson added that CRT will continue to be effective credit-risk management tool “that will exist outside of conservatorship” for Fannie and Freddie as well.

FHFA oversees Fannie Mae and Freddie Mac, which have been in conservatorship since 2008 in the wake of the global financial crisis of that era. The two GSEs, or agencies, buy loans from lenders, pool them and issue mortgage-backed securities that are sold to investors and guaranteed for a fee by Fannie and Freddie.

The recently finalized capital-rule change for CRT deals — which Thompson referred to during her MBA talk — cuts in half the risk-weighting formula for CRT deals, from 10% to 5% for retained CRT exposure. The rule became effective 60 days after it was published in the Federal Register in mid-March.

That modification of the capital-retention risk weight for CRT exposure, along with other adjustments to the capital-reserve requirements, “would make CRT transactions somewhat more economic” and “expand the risk-reducing and competitive benefits of CRT transactions,” Ed DeMarco, president of the Housing Policy Council, an industry group, wrote in a letter late last year to FHFA’s general counsel in support of the then-proposed change to the CRT risk-weighting measure.

“CRT transactions lessen the systemic risk posed by the enterprises (GSEs) by reducing the concentration of that risk on the enterprises’ balance sheets and the volatility inherent in the credit performance of the enterprises’ guarantee business,” DeMarco wrote in the letter. 

The agencies’ major credit-risk transfer programs include Freddie Mac’s Structured Agency Credit Risk, or STACR, note offerings; and its Agency Credit Insurance Structure, or ACIS, transactions. Fannie Mae has similar CRT programs, which include its Connecticut Avenue Series, or CAS, note offerings; and its Credit Insurance Risk Transfer, or CIRT, transactions.

“When they do a credit-risk transfer transaction, it’s taking risk from that huge bucket [the reference loan pool] and selling off most of the credit-risk pieces,” Roelof Slump, managing director of U.S. RMBS at Fitch Ratings, explained in a prior interview.

Through the STACR and CAS note offerings, private investors participate with Fannie and Freddie in sharing a portion of the mortgage credit risk in the reference loan pools retained by the GSEs. Investors receive principal and interest payments on the CRT notes they purchase, but if credit losses exceed a predefined threshold per the security issued, then investors are responsible for absorbing the losses exceeding that mark.

Through the CIRT and ACIS transaction, a portion of the credit risk on mortgages backed by Fannie and Freddie is shifted to insurers in the private sector. The agencies pay monthly premiums in exchange for insurance coverage on a portion of the designated reference loan pools.

Year to date through early June of this year, based on an analysis of information released by Fannie Mae, the agency has transferred some $10.8 billion in risk (referred to “as risk in force”) from reference loan pools valued at $362 billion via five CIRT insurance deals and six CAS securities offerings — which includes the latest CAS offering. 

That compares to all of 2021, when Fannie transferred $5.4 billion in risk from reference loan pools valued in total at $206 billion via 2 CIRT insurance deals and 3 CAS securities offerings.

Fannie paused its CRT program in March 2020, in part over concerns about the draconian capital rules for agency CRT deals adopted during the Trump era. Fannie Mae did not resume its CRT offerings until October 2021, after the new capital rules were initially proposed last year, as noted by Thompson at the MBA convention. Freddie resumed its CRT issuance in July 2020.

“In 2022, we look forward to bringing [to market] approximately $15 billion in our on-the-run CAS … transactions, subject to market conditions and other factors,” said Devang Doshi, senior vice president of single-family capital markets at Fannie Mae, in a statement about the CAS program. Doshi did not comment on the goals for the CIRT program.

Since inception in 2013 to date, Fannie Mae has transferred risk from reference loan pools valued at nearly $2.8 trillion via its CRT program, with some $85 billion in risk coverage active, the agency’s data shows. 

Fannie’s competitor, Freddie Mac, year to date through early June 2022 has transferred a total of $10.9 billion in risk from reference pools valued at $300.9 billion via five STACR and three ACIS deals. For all last year, Freddie transferred $19.3 billion in risk on loan pools valued in total at $845.6 billion via 10 STACR securities offerings and 8 ACIS insurance deals, data from Freddie shows.

Freddie earlier this year announced that it expects issuance volume of at least $25 billion in 2022 for its CRT program, including STACR and ACIS transactions. Since inception in 2013 to date, Freddie has transferred risk from reference loan pools valued at $3 trillion via its CRT program, with $98 billion in risk coverage active, according to an accounting on the agency’s website.

Combined, then, Fannie and Freddie’s CRT programs from 2013 to date have transferred to the private sector a portion of the risk from reference mortgage pools valued collectively at $5.8 trillion. The agencies have more than $180 billion in risk coverage active on those mortgage pools — representing about 3.1% of the total unpaid loan balance.

“To the extent that something catastrophic or really bad happens … we think that it’s really important … to make sure that the taxpayers are covered, and that Fannie and Freddie are covered as well, and that the credit risk is transferred to private investors, which we think is really responsible,” Thompson said at the MBA convention. “It’s a really good credit-risk management tool.”

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