Significant Risk Transfer

The Structured Finance Association is working to create a level playing field where all participants receive equitable capital treatment for similarly structured risk transactions.

Briefing

Commercial banks, reinsurers, mortgage insurers, REITs, and investment firms are an important source of capital in the mortgage market and help to ensure that homeowners can access affordable mortgage products. Regulators and policymakers play a crucial role in establishing the regulatory and capital framework for these investors and intermediaries to obtain capital relief where appropriate, and that they do so in a safe and sound manner. One such method for obtaining capital relief is significant risk transfer, or SRT.

Since 2014, the Federal Housing Finance Agency (FHFA) has required the GSEs to engage in credit risk transfer (CRT) transactions as part of their annual scorecard requirements. During that time, Fannie Mae and Freddie Mac (GSEs) have sold $22B of credit risk to the capital markets on a total unpaid principal balance of single family of $643B

In 2018, the FHFA released a proposed capital rule for the Enterprises. Under that proposal, the GSEs receive substantial capital relief for CRT transactions, recognizing the contractual transfer of risk away from the GSEs to private investors. However, banks and other private financial institutions do not receive any capital relief for engaging in similar CRT transactions. The unequal capital treatment results in higher costs, less efficient business operations, and a significant competitive disadvantage for private sector participants relative to the GSEs.

The Structured Finance Association is working to create a level playing field where all participants receive equitable capital treatment for similarly structured risk transactions.

This involves educating policymakers and—where appropriate—advocating for changes or clarifications to in significant risk transfer transactions. Such steps will ultimately benefit consumers as more private capital will be available to provide access to credit.

As policymakers work to expand the use of private capital in housing finance, SRT transactions represent significant potential to expand the breadth and depth of investors able to support these efforts.

Jim Bennison, EVP-Alternative Markets, Arch Capital Group

Contact

Dallin Merrill

Senior Vice President, MBS Policy

Dallin.Merrill@structuredfinance.org