FHFA Extends Response Period for Credit Risk Transfer Input
The Federal Housing Finance Agency yesterday announced a 45-day extension of the response period for its Single-Family Credit Risk Transfer Request for Input.
The input period was previously set to close on August 29, 60 days after FHFA published the RFI. The response period will now close on October 13.
FHFA said it extended the input period in light of requests from stakeholders for more time to evaluate the information and questions raised in the RFI, which lays out FHFA’s principles of credit risk transfer and seeks feedback on credit risk transfer policy issues and on proposals to adopt front-end credit risk transfer.
In 2012, FHFA initiated development of a credit risk transfer program intended to reduce Fannie Mae’s and Freddie Mac’s overall risk and the risk they pose to taxpayers while in conservatorship. Fannie Mae and Freddie Mac implemented their credit risk transfer programs in 2013 and now transfer to private investors a substantial amount of the credit risk the Enterprises assume in targeted loan acquisitions.
The programs include credit risk transfers via debt issuances, insurance/reinsurance transactions, senior-subordinate securitizations and a variety of lender collateralized recourse transactions.
“The Credit Risk Transfer Progress Report demonstrates transparency and documents that there has been a great deal of progress in the credit risk transfer market in a short period of time, even though the market is still relatively young,” said FHFA Director Melvin Watt. “The Request for Input demonstrates our commitment to build upon the progress and expand the array of credit risk transfer products. Feedback from stakeholders is critical as we explore additional ways to enhance these programs and expand the investor base.”
The Mortgage Bankers Association has long advocated for risk-sharing agreements. In July, MBA President and CEO David Stevens, CMB, said for risk transfers to work, “we need a solution that is accessible and usable by all lenders large and small.”
MBA strongly supports requiring the GSEs to test new approaches to up-front risk-sharing to increase private capital’s role in the mortgage market, to provide additional executions for lenders of all sizes and business models, and to potentially lower costs for borrowers.
“Greater use of up-front risk-sharing would place more private capital ahead of the GSEs, protecting the taxpayer and diversifying the holders of credit risk,” MBA said in a recent Issue Paper (https://www.mba.org/residential-issues). “This is a better alternative for attracting private capital back to the market than the FHFA’s prior efforts to raise [guaranty fees] in an effort to ‘crowd-in’ private capital. It is also aligned with FHFA’s goal to diversify the forms of credit risk transfer used by the GSEs.”
MBA’s up-front risk-sharing proposal would provide additional execution options to lenders and have the potential to benefit borrowers through reduced mortgage costs. It said up-front risk-sharing would allow lenders to secure deeper credit enhancement in exchange for lower g-fees and loan-level price adjustments. Multiple forms of credit enhancement should be eligible: “deeper cover” private mortgage insurance; lender recourse; and structured finance.
“Private capital should cover most of the credit risk exposure, covering the risk to an effective loan-to-value ratio of 50 or 60 percent, leaving Fannie Mae and Freddie Mac to cover only catastrophic risk,” MBA said.
