FHFA Seeks Comments on Front-End Risk Transfer Deals for Fannie, Freddie

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Representative Mel Watt, a Democrat from North Carolina and U.S. President Barack Obama's nominee as director of the Federal Housing Finance Agency (FHFA), speaks during a Senate Banking Committee nominations hearing in Washington, D.C., U.S., on Thursday, June 27, 2013. Watt faced lawmakers skeptical of his knowledge of housing finance issues today at a Senate Banking Committee hearing on his nomination to oversee mortgage giants Fannie Mae and Freddie Mac. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Mel Watt

The Federal Housing Finance Agency is soliciting industry input on how to improve Fannie Mae and Freddie Mac's credit risk transfer transactions, for the first time considering front-end transactions rather than back-end deals.

The two government-sponsored enterprises have completed $1 trillion in credit-risk transfer sales to investors since 2012, but those pools of mortgages were closed and seasoned. Many in the industry have been pressing FHFA to offer front-end transactions, where a private mortgage insurance company or investor could bid on the credit risk of newly pooled loans. That could directly impact the pricing of loans and provide benefits to borrowers, they argue.

FHFA issued a request for comment on Wednesday to help "in their ongoing analysis of front-end credit risk transfer transactions in which a portion of the credit risk is transferred prior to enterprise acquisition of the underlying mortgage."

FHFA Director Mel Watt said that the "request for input demonstrates our commitment to build upon the progress and expand the array of credit risk transfer products. Feedback from stakeholders is critical as we explore additional ways to enhance these programs and expand the investor base."

Front-end transactions could also help pave the way for housing finance reform. In April, a group of five housing finance experts released a paper that urged FHFA to consider front-end transactions as part of the transition to a new system.

Back-end deals are easier to conduct than front-end deals. But proponents of front-end deals claim the bids on credit risk are more competitive and transparent.

As they evaluate front-end transactions, FHFA officials will be looking to see if they are repeatable, scalable and increase the investor base for GSE credit risk transfers.

It wants to avoid situations where a winning bidder can't fulfill their obligations when loans go into default. The agency also wants to ensure a level playing field so that front-end transactions don't favor large lenders over small lenders.

Comments on the plan are due in 60 days.

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