Page 29 - The GSE Report March-April 2018

FANNIE MAE AND FREDDIE MAC MJARN.U-ARPYR.20210818
references, such as rent payments, utility payments, etc. In conjunction with changes made by Fannie Mae in September 2016, both enterprises now accept delivery of eligible loans for borrowers without credit scores in accordance with enterprise-approved underwriting policies.
“In collaboration with Fannie Mae and Freddie Mac, FHFA has made significant progress in meeting our conservatorship objectives,” said FHFA Director Mel Watt. “This report underscores our commitment to transparency as we continue to foster liquidity and efficiency in the housing finance markets, reduce risk to taxpayers and build a new mortgage securitization infrastructure,
all in a safe and sound manner.” (2017 Scorecard Progress Report, Federal Housing Finance Agency, 03/29/18; HousingWire, Kelsey Ramirez, 03/23/17; HousingWire, Ben Lane, 03/29/18)
A closer look at Fannie Mae’s and Freddie Mac’s risk-sharing transactions
In a February white paper, Federal Reserve Bank of New York’s David Finkelstein, Andreas Strzodka and James Vickery argue that the enterprises’ credit risk transfer is “de facto” GSE reform. They wrote:
...[W]e believe that the Fannie Mae and Freddie Mac credit risk transfer programs have to date been a notable success. The programs have reduced the exposure of the GSEs and the Federal government to mortgage credit risk without disrupting the liquidity or stability of mortgage secondary markets. In the process, the CRT programs have created a new financial market for pricing and trading mortgage credit risk, which has grown in size and liquidity over time and attracted a broad base of investors. A key benefit of the structured CRT bonds used to date by the GSEs, compared to other possible types of mortgage risk transfer such as reinsurance, is that the market prices of these bonds provide real-time market information about the price of credit risk in the mortgage market.
We note that the CRT programs have not yet been tested by an adverse macroeconomic environment, and we cannot be certain how CRT investor demand and pricing will evolve under such conditions... Careful management of the programs will likely be needed during such an episode. ...[T]here are also a several outstanding questions about the design
of CRT instruments, and how to maximize secondary market liquidity and enhance the breadth of the investor base. The credit risk transfer programs will continue to grow and evolve in response to these considerations.
Even in the absence of legislation, the CRT program represents a valuable step forward towards GSE reform, as well as a basis for future reform. Many proposals have been put
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