Fannie Mae to relaunch credit risk transfers
Fannie Mae announced that he was going to restart his credit risk transfer program by the fourth quarter of 2021, following proposed changes to its capital rule.
The company said it plans to transfer mortgage credit risk through its Connecticut Avenue Securities and Credit Insurance Risk Transfer programs.
The announcement follows adjustments Federal Housing Finance Agency would do with the capital rule proposed last year, to “better reflect the risks inherent in companies’ business models and encourage companies to distribute acquired credit risk to private investors rather than buying and holding that risk”, according to the FHFA.
Industry stakeholders have said the Trump-era rule’s leverage cushion is “excessive compared to bank regulators.”
The changes proposed by the FHFA would replace the prescribed fixed amount of leverage cushion with a dynamic amount. The changes would also reduce the prudential floor on the risk weight assigned to the retained CRT exposure and remove the requirement that a company must apply an overall efficiency adjustment to its retained CRT exposures in accordance with the securitization framework of the CRT. ERCF.
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Since March 2020, Fannie Mae has been on hiatus from credit risk transfers. His counterpart, Freddie mac, took over CRT’s issuance in July 2020.
The CRT structure, pioneered by Freddie Mac in 2013, transfers some of the risk of credit losses on the mortgages they give back to investors.
Fannie Mae and Freddie Mac pay investors in return for some of that risk. These investors can choose from four bands of risk exposure, the first being the safest and the fourth taking the highest risk of loss. GSEs keep the riskiest tranche.
From 2013 to February 2021, GSEs lost $ 126 billion in risk, at a net cost of $ 15 billion. A May FHFA report, edited by Mark Calabria, raised concerns about the prepayment risk for the CRT structure, which it said had “not been tested by a widespread severe loss event.” . GSE’s portfolios have had very low levels of delinquency throughout the pandemic.