SFA White Paper: Economic Benefits of Credit Risk Transfer Transactions for GSEs

One of the notable successes of the GSE’s time in conservatorship has been the use of Credit Risk Transfer (“CRT”) to distribute mortgage credit risk throughout the capital and reinsurance markets. Importantly, the benefits of CRT have been demonstrated over time, by industry experts, regulators, and leaders who were tasked with addressing the issues that led to the GSEs being placed in conservatorship a decade ago. Risk transfer transactions are important and widely accepted capital management techniques.

Prior policy decisions by the Federal Housing Finance Agency (“FHFA”)—particularly the 2020 Enterprise Capital Rule—along with a report from the FHFA do not adequately take into account the utility and cost effectiveness of programmatic CRT issuance by the GSEs.

Therefore, we were especially pleased to see the September 15, 2021 announcement that the FHFA had undertaken to review the Enterprise Capital Framework, including the capital treatment of CRT “to better reflect the risks inherent in the Enterprises’ business models and to encourage the distribution of credit risk from the Enterprises to private investors.” We look forward to providing input on that proposed rulemaking.

This paper, in a manner consistent with SFA’s own comment letter on the 2020 Enterprise Capital Rule, represents an effort to add to the commentary from almost all interested members of the public in support of GSE CRT programs, provides statistics on credit risk transfer securities relative to the performance of the underlying risk itself, and highlights the risk-distribution benefit of programmatic issuance of such transactions under a more reasonable capital framework.