House bill would force more GSE risk transfers

The Scotsman Guide - Victor Whitman - 09 December 2016

Fannie Mae and Freddie Mac would be forced to transfer more loan risk to private capital under a bill introduced by two members of the U.S. House of Representatives this week. 

H.R. 6487, the Taxpayer Protections and Market Access for Mortgage Finance Act, would compel the Federal Housing Finance Agency (FHFA) to beef up its mandate on the government-sponsored enterprises (GSEs) to transfer risk to private capital.The bill, which was authored by Rep. Ed Royce, R-California, and Gwen Moore, D-Wisconsin, also would create five-year pilot programs to test deeper coverage by private insurers, and amend federal laws to allow more companies to participate in the risk-transfer deals, including real estate investment trusts (REITs).

Risk sharing is a hotly debated issue in the mortgage industry. Credit transfers began in 2013. In the three years through 2015, Fannie and Freddie offloaded a total of $30.6 billion in credit risk on an unpaid loan-principal balance of $838 billion. 

In most cases, the GSEs have sold the risk to asset managers and hedge funds by issuing risk-sharing bonds. These are known in the industry as “back-end” deals because the risk is transferred after Fannie and Freddie purchase the loans that are to be securitized as part of the GSEs' larger mission. The government is exploring the use of so-called front-end models, where the GSEs offload the risk on individual loans or on a pool of loans before the loans are purchased and securitized by the GSEs. One way to do this would be to expand the role of private insurers.

The industry doesn't agree on the best way to carry out risk transfers, however. Trade associations that represent smaller lenders are fearful that Wall Street banks will dominate future credit-transfer structures and pass on savings to their affiliated companies that make loans.

Some of Fannie and Freddie's private shareholders also have raised objections to the cost of the risk transfer and questioned whether the structures were actually transferring any real risk. Risk transfers are now arranged for most newly originated 30-year-fixed loans with higher loan-to-value balances.

Industry’s response to the Royce/Moore bill has been mixed. The U.S. Mortgage Insurers said it was encouraged that the lawmakers have sought to do a greater degree of risk transferring and recognized the role of private mortgage insurance.  

Smaller-lender trade groups were skeptical. Glen Corso, executive director of the Community Mortgage Lenders of America, said Congress should hold hearings to determine if the previous deals have removed risk or merely satisfied a mandate handed down by the FHFA. 

“We are in favor of risk sharing, but are concerned that risk-sharing mandates lead to decisions that satisfy the mandate, but do not truly shift risk,” Corso said. 

Scott Olson, executive director of nonbank trade group the Community Home Lenders Association, said the bill would significantly boost the levels of risk sharing. Olson doubted that a narrowly focused bill would be passed, however, and saidrisk-sharing mandates will likely be dealt with in a more comprehensive GSE reform bill.