“Your Dec. 31 editorial “Fannie and Freddie Forever” rightfully raises concerns over the types of credit-risk transfers (CRT) that are being conducted by Fannie Mae and Freddie Mac (the government-sponsored enterprises), and the residual risks they pose to the taxpayers.”, David H. Stevens, President and CEO, Mortgage Bankers Association
Opinion, January 5, 2016, The Wall Street Journal
Toxic Twins’ Potentially Poisonous New Brew
The GSEs should engage in upfront risk-share deals where private-market participants would take on credit risk before the loan even gets sold to the GSEs and ensure access for all lenders.
Your Dec. 31 editorial “Fannie and Freddie Forever” rightfully raises concerns over the types of credit-risk transfers (CRT) that are being conducted by Fannie Mae and Freddie Mac (the government-sponsored enterprises), and the residual risks they pose to the taxpayers. One important way to reduce taxpayer exposure is to require the GSEs to transfer the credit risk before they acquire the loans. The current CRT deals conducted by the GSEs are opaque and complex debt securities that continue to leverage the GSEs’ implied government guarantee.
The GSEs are currently setting a price on those deals based on uncertain future outcomes in the credit markets. If the GSEs’ predictions are wrong, they could lose and the taxpayer could pay the price. Instead, the GSEs should engage in upfront risk-share deals in which private market participants, like mortgage insurers and other private entities, or even originators themselves, would take on credit risk before the loan even gets sold to the GSEs, and ensure access for all lenders. This is an approach that the FHFA has directed the GSEs to explore, and one that represents a meaningful effort to further de-risk the two institutions and protect taxpayers.
David H. Stevens
President and CEO
Mortgage Bankers Association
Your editorial accurately illuminates the self-perpetuating political rationale for the development of these credit-risk transfer products by the toxic twins. However, your readers should know that the political cover suggested in the piece is just a minor down payment on a much larger investment strategy to solidify the twins’ insulated role in their faux “market.” Not mentioned, and rarely discussed in any media, is the Federal Housing Finance Authority’s Common Securitization Platform (CSP). A Fannie-Freddie joint venture, this initiative has “the strategic goal of developing a new securitization infrastructure for Fannie Mae and Freddie Mac (the Enterprises) for mortgage loans backed by 1-4 unit (single-family) properties. To achieve that strategic goal, the Enterprises, under FHFA’s direction and guidance, are developing a common securitization platform (CSP) that will support their single-family mortgage securitization activities, including the issuance by both Enterprises of a single mortgage-backed security (Single Security).” See the September 2015 FHFA website CSP update for more detail.
The effort, under way since 2012 with fully loaded costs now nearing $500 million, plans to announce a date for first productive use sometime in 2016. The new venture advertises a long-term goal of the platform being used by other market participants (read: competitors to Fannie and Freddie). However, the investment and current exclusivity bestowed on the GSEs will create an unassailable barrier-to-entry for any private-sector firm attempting to compete on risk, volume or pricing. All this comes at least three years after congressional and even Oval Office agreement that these two organizations should be wound down. At this point, no one should look for such a change in their lifetime. Referencing what you aptly put in the editorial’s closing, I for one have no illusions on why Donald Trump is winning.