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Credit Risk Transfer: Making a Successful Program Even Better

Faith Schwartz    |    Housing Policy

On February 10, CoreLogic and the Urban Institute hosted a sunset seminar on “Credit Risk Transfer (CRT): Making a Successful Program Even Better." The premise behind this event was that CRT is an important step forward for the participation of private capital within the housing finance market while lowering risk and cost to the Government Sponsored Enterprises (GSEs) and, thus, taxpayer exposure.

The panel of experts consisted of Faith Schwartz, CoreLogic;  Andrew Davidson, Andrew Davidson & Co.;  Bill Roth, Two Harbors; Howard Altarescu, Orrick; Rohit Gupta, Genworth, and Laurie Goodman, Urban Institute.

The discussion began with the existing balance of CRT to date and the potential growth of the CRT based on guidance from the Federal Housing and Finance Agency (FHFA) annual 2016 scorecard. When asked how much more is needed, it was noted that recently coverage amounted to $10-15 billion per year and could easily double to reach the desired state. There was a robust discussion around expanding the credit investors to include greater participation by Mortgage Real Estate Investment Trusts (mREITs).   mREITs are very involved with investing in subordinate tranches of mezzanine securities from the private label securitization market; however, as of July 2015, they were only invested in 2 percent of the current STACR and CAS deals.[1]

With higher REIT participation, it was noted that liquidity and depth of the market would improve.

As the general thinking goes, expanding the investor base is attractive to many who desire more depth of liquidity in the housing market. Expanding the types of investors in this market is healthy for bringing back more private capital and reducing government, taxpayer-backed risk in the housing finance system.

One of the key constraints to greater mREIT participation rests with the definition of acceptable assets for investment. Because STACR and CAS are debt securities of the GSEs, they are not considered to be “real estate assets” nor representing “interests” in mortgages or other real estate, as defined under today’s securities law and Treasury regulations, thereby limiting mREIT participation. There are conversations going on with the regulatory agencies and members of Congress to modify these definitions so as to allow these types of CRTs to become a good asset for mREIT investment. At this point, this change would require an act of Congress.

The CEO and President of Genworth U.S. Mortgage Insurance, Rohit Gupta, spoke about a new and enhanced model of front-end risk share which would define the transaction at the time a mortgage is created.  Deeper front-end mortgage insurance would lower the risk to the GSEs and potentially offer a lower all-in fee to the consumer. While there is no one answer to how risk transfer is best utilized, having several options with various structures, offerings and front-end and back-end models shows continued opportunity to innovate. This will continue to expand options for CRT for better evaluation of the policy goal trade-offs.

Urban Institute director of the Housing Finance Policy Center, Laurie Goodman reminded us of the new FHFA scorecard which guides the current path ahead for the GSEs in-lieu of legislative action. She outlined several goals that ranged from reducing taxpayer risk to minimizing volatility and lowering risk in the housing finance system.  Throughout her presentation it was clear, some options are more effective than others in meeting the policy objectives of CRT. The general consensus of the panel was that good things are happening with CRT and new and evolving approaches to the risk share will continue to be good for deep and sound housing finance marketplace.

Download Full Event Materials:

1STACR (Structured Agency Credit Risk) and CAS (Connecticut Avenue Securities) are the CRT debt securities issued by Freddie Mac and Fannie Mae, respectively.

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