CRT protects GSEs and taxpayers against unexpected disasters
After reading the recent report of Federal Housing Finance Agency on the performance of Fannie Mae and Freddie Mac ‘s credit risk transfer programs, anyone unfamiliar with CRT’s goals might naturally conclude that GSEs have vastly overpaid financial market investors and insurers to shift credit risk off their books. After all, the FHFA reported that since 2013, GSEs had paid around $ 15 billion in interest and premiums for their CRT coverage while only receiving $ 50 million in write-downs or refunds.
I can’t dispute the statistics reported by FHFA, but they don’t tell the whole story.
Let me make an analogy. Suppose you have a home in the heart of Oklahoma’s tornado alley and pay your home insurance on a regular basis. So far, however, your house has been untouched by the wind and you have not made any claims against your insurance coverage. Does this mean that you have paid too much in insurance premiums? Or that you might be better off canceling your home’s insurance coverage altogether?
It would be financially irresponsible for the Oklahoma owner to come to that conclusion. The same goes for CRT programs of GSEs. The premium cost over recaptured losses that underlies the recent FHFA report oversimplifies the reasons GSEs transfer credit risk and understates the extraordinary potential of protecting taxpayers from losses. unforeseen during times of economic crisis.
After all, Freddie and Fannie have consistently been profitable in the eight years since launching their CRT programs. If the most important determination of CRT’s effectiveness were a close comparison between cost and recovery when the housing market is strong, then one could similarly conclude both their guarantee costs – the premiums in essence as the GSE are raising to provide a credit guarantee – and the nearly $ 300 billion in capital the FHFA is claiming in its recently published Enterprise Capital Rule is excessive.
The G fees and the enterprise capital requirement are set, in part, to account for expected and unforeseen losses. CRT transactions, on the other hand, are generally designed to cover only unforeseen losses. Simply put, we haven’t seen any unexpected losses between 2013 and the first quarter of 2021.
The advantages of CRT are numerous.
January 2020 white paper for the Harvard Joint Center for Housing Studies cites five challenges that GSEs try to solve by transferring credit risk to private investors:
- Reduce systemic risk in housing finance in the United States;
- Reduce taxpayer exposure to Fannie Mae and Freddie Mac;
- Provide real-time feedback to GSEs on the credit risks that GSEs undertake and introduce market discipline into their business practices;
- Reduce the cost of GSE capital; and
- To reduce the level of g-fees charged by Fannie and Freddie.
The first thing to note when reading this list is that there is no mention of the comparison of the amount of the premium and the interest paid by the GSEs with the corresponding depreciations and reimbursements. It just wasn’t a CRT goal. The second conclusion is that CRT has proven in the affirmative that it can solve four of the five challenges. The only unresolved point is the reduction in overheads, the status of which remains uncertain largely due to the recently finalized corporate regulatory capital framework. To reign.
CRT serves as a low-cost source of alternative capital for GSEs. In fact, given that – until recently – GSE’s capital was close to zero, CRT was the only thing standing in front of taxpayers. Between July 2013 and February 2021, reports the FHFA, approximately $ 126 billion of enforced risk (RIF) had been placed through the issuance of securities and insurance / reinsurance operations. As of February 2021, $ 72 billion of the RIF remained in effect. Today, that $ 72 billion still falls between GSE and taxpayer exposure to future unanticipated losses.
What does the FHFA report say about this benefit? It’s silent. In fact, in a footnote, he acknowledges that “the net cost to GSEs does not take into account the relief of capital requirements, imputed capital constraints, imputed or actual costs of capital”.
Again, the FHFA report does not provide a full account of the benefits of CRT.
The COVID-19 pandemic has been a timely reminder that dire economic events can happen without warning. The housing market has been largely untouched by federal government forbearance and relief from foreclosures, improved unemployment insurance benefits and stimulus packages. Next time it may not be.
Beyond the pandemic, the FHFA capital rule significantly reduced the capital credit for CRT and prompted Fannie Mae to end her CRT program. The main player in the classic American mortgage market is once again accumulating risks without any protection. Fannie Mae’s decision is akin to that of the Oklahoma homeowner canceling insurance coverage.
This business model proved ineffective just over a decade ago, when GSEs last suffered unexpected losses. This is a dangerous development and the re-establishment of systematic risk transfer programs in GSEs should be a top priority for all housing decision makers.
Is there room for improvement in the structure and design of the CRT in the future? Absolutely. We have already seen changes, such as the elimination of fixed gravity transactions that existed in the early CRT agreements, and we welcome the opportunity to explore further improvements. But make no mistake: CRT is working and together we can make it even better.
This column does not necessarily reflect the opinion of the editorial staff of HousingWire and its owners.
To contact the author of this story:
David Gansberg at [email protected]
To contact the editor responsible for this story:
Sarah Wheeler at [email protected]