MBA Urges Level Playing Field, Transparency in GSE Credit Risk Transfer Programs

The Mortgage Bankers Association, in an Oct. 11 letter to the Federal Housing Finance Agency, said any FHFA rules regarding credit risk transfer programs for Fannie Mae and Freddie Mac should ensure a level playing field for all lenders and improve transparency.

The letter responded to a June 29 FHFA Request for Input on the government-sponsored enterprises’ CRT programs. These programs, begun in 2013, are designed to transfer single-family mortgage credit risk from the GSEs to private capital investors, protecting the taxpayer and affording the opportunity for more transparency in the market. The RFI asked for comment on the programs generally, the framework used by FHFA to evaluate the programs’ effectiveness and specific questions included by FHFA on certain policy areas.

MBA’s comments emphasized several points:

–The programs need to maintain a level playing field in executing these transactions in order to preserve the credit pricing and access parity enjoyed by lenders of all sizes today;

–The GSEs must improve transparency and consider borrower impact in developing and selecting structures; and

–MBA called for more experimentation to find products that are less volatile and simpler to use than the current structures.

“MBA urges FHFA and the GSEs to continue building upon this early foundation to create a broadly diversified market for mortgage credit risk that accommodates participants of all sizes and business models on equivalent terms,” wrote MBA President and CEO David Stevens, CMB. “CRT programs have significant value for the GSEs and taxpayers by providing protection against credit losses.”

The letter noted, however, these programs also have the potential to benefit the market as a whole, citing two primary types of CRT transactions: “back-end,” such as STACR and CAS; and “front-end,” such as lender recourse, deep-cover mortgage insurance and other capital markets executions that can permanently transfer credit risk prior to GSE acquisition. The former requires the credit risk to be transferred by the GSE after the loans are acquired and for the GSEs to carry this risk until it can be shed into the market; the latter, on the other hand, transfer the risk prior to or at the time the loan is delivered to the GSE.

“MBA has for decades advocated for a bright line between primary and secondary markets,” the letter said. “One aspect of this bright line is that primary market lenders select front-end credit enhancements, while the GSEs structure back-end credit enhancements.”

MBA said it “critically important” for the GSEs to develop and implement additional CRT structures accessible to lenders of all sizes and business models to avoid re-concentration of the origination and servicing market.

“Deal terms should be made transparent and accessible to participants of all sizes on equivalent terms, including experimenting with lower collateral requirements or risk tranches,” the letter said. “Additionally, pledged collateral should be subject to the same analysis and economic terms for all participants, regardless of size or business model. Providing viable CRT structures on equal terms for all approved Seller/Servicers will also ensure that the CRT programs preserve today’s parity in credit pricing, i.e. guarantee fees and LLPAs.”

MBA said up-front risk-sharing structures with committed mortgage market participants such as lenders, mortgage Real Estate Investment Trusts and mortgage insurers can distribute mortgage credit risk prior to the loan(s) being acquired by the GSEs, while offering potential borrower benefits. MBA pointed out that none of the transaction structures used in the CRT program to date have experienced a stress environment, meaning the GSEs could have significant market exposure if investor demand for STACR and CAS proves to be pro-cyclical.

“Well-conceived up-front risk sharing pilot programs, such as expanded lender recourse offerings, deeper mortgage insurance or other capital markets structures that are executed prior to GSE acquisition, can help the GSEs better determine which transaction structures are best able to expand the sources of private capital and withstand both the peaks and valleys in the credit cycle,” MBA said.

With that said, MBA said back-end CRT transactions should continue to be part of the GSEs’ menu of options.

“Transactions like STACR, CAS, and pool reinsurance could provide valuable pricing signals to the market if the GSEs increase their transparency,” the letter said. “It is this potential that has caused nearly every GSE reform proposal to date to build from the foundation described in the Progress Report. However, more needs to be done to create a deep and diversified risk transfer program that is open to participants of all sizes and business models on equivalent terms.”