Government Lending

Fannie Mae to restart credit risk transfers

Last week, the FHFA proposed changes to the capital rule that would remove disincentives for shifting some risk to private investors

Fannie Mae announced that it will restart its credit risk transfer program by the fourth quarter of 2021, following proposed changes to its capital rule.

The company said it expects to transfer mortgage credit risk via its Connecticut Avenue Securities and Credit Insurance Risk Transfer programs.

The announcement comes on the heels of tweaks the Federal Housing Finance Agency would make to last year’s proposed capital rule, to “better reflect the risks inherent in the Enterprises’ business models and encourage the Enterprises to distribute acquired credit risk to private investors rather than to buy and hold that risk,” according to the FHFA.

Industry stakeholders have said the Trump-era rule’s leverage buffer was “excessive compared to bank regulators.”

The amendments FHFA proposed would replace the fixed prescribed leverage buffer amount with a dynamic amount. The changes would also reduce the prudential floor on the risk weight assigned to retained CRT exposure and lift the requirement that an enterprise must apply an overall effectiveness adjustment to its retained CRT exposures in accordance with the ERCF’s securitization framework.

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Since March 2020, Fannie Mae has been on a hiatus from credit risk transfers. Its counterpart, Freddie Mac, resumed CRT issuance in July 2020.

The CRT structure, which Freddie Mac pioneered in 2013, shifts a portion of the risk of credit losses on the mortgages they back onto investors.

Fannie Mae and Freddie Mac pay investors in exchange for assuming a portion of that risk. Those investors can choose from four tranches of risk exposure, the first being the safest and the fourth taking on the highest loss risk. The GSEs keep the riskiest tranche.

From 2013 to February 2021, the GSEs shed $126 billion of risk, at a net cost of $15 billion. A May report from the FHFA, under the leadership of Mark Calabria, raised concerns about prepayment risk to the CRT structure, which it said was “untested by a widespread serious loss event.” The GSE portfolios have had very low delinquency levels throughout the pandemic.

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