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FHFA, Treasury Working on GSE Risk Sharing Model

JUN 4, 2012 9:59am ET
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Treasury Department officials are working with the Federal Housing Finance Agency on ways to structure Fannie Mae and Freddie Mac MBS, allowing private investors to share in some of the credit risk on government-guaranteed securities.

Michael Stegman, a special advisor to the Treasury secretary, told housing market researchers on Friday that Treasury supports this strategic objective that FHFA has mapped out for the two government sponsored secondary market agencies.

“We believe that this initiative could help support our broader efforts to restart the private mortgage market, shrink the government’s footprint in housing finance, and protect the long-term interests of taxpayers,” Stegman told the American Real Estate & Urban Economics Association.

“It can also help determine how the market values a credit guarantee on conforming mortgages, which is a question that many stakeholders and policymakers have been closely analyzing,” he said.

Earlier this year, FHFA acting director Edward DeMarco updated his strategic plan for the GSEs. And last Thursday, DeMarco choose one of his deputy directors Wanda DeLeo to act as coordinator for the development and implementation of the strategic goals.

One goal calls for Fannie and Freddie to develop an alternative securities structure where investors bear some or all of the credit risk.

In addition, FHFA provided compensation incentives for GSE executives if they initiate risk sharing transactions by the end of September.

The Treasury special advisor on housing policy noted that Treasury’s “very talented staff” is helping FHFA and the GSEs think through some of the issues involved in structuring risk-sharing MBS.

These issues involve ensuring that new GSE securities are to-be-announced (TBA) eligible and continue to be attractive to a wide investor base. The tax and legal treatment of the MBS must also be addressed.

“Treasury is actively engaged in helping to make this initiative work,” Stegman said.

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