Fannie Mae regains lead in annual credit-risk transfer issuance

There was a notable change in the difference between Fannie Mae and Freddie Mac's credit-risk transfer activity in 2022, when volume inched up to a new high during the year.

Overall, single-family CRT issuance rose to just over $1.06 trillion last year compared to more than $1.05 trillion in 2021.

Fannie produced more new single-family CRTs than Freddie Mac annually for the first time since 2019 based on the unpaid principal balance of the reference pools of mortgages involved. The two agencies pay investors to share some of the risks associated with those loans.

Fannie's total issuance for the year was $535 billion, which allowed the government-sponsored enterprise to gain a slight lead over the $528 billion that Freddie Mac issued. Last year, Fannie issued just $206 billion, compared to Freddie's $846 billion.

A shift in the capital framework for the two government-sponsored enterprises led to the reversal of a two-year trend in which Freddie Mac had been the bigger player. Trump administration officials had added CRT deterrents but Biden White House officials removed them. Freddie had continued to issue CRT when the deterrents were in place, but had Fannie temporarily pulled back from the market in response.

While Fannie Mae pulled ahead for the year, Freddie remains the larger player based on cumulative reference pools since the program began in 2013 due to that pullback. Cumulative reference pools total more than $3.26 trillion for Freddie and over $2.98 trillion for Fannie for a total in excess of $6.24 trillion.

Reference-pool mortgages targeted for risk sharing are generally single-family loans with long-term fixed rates loan-to-value ratios above 60%.

Some commentators remain concerned about whether the capital framework should account for a higher level of risk designed to address concerns about CRT market disruptions like the one that occurred early in the pandemic.

The agencies use a variety of different CRT strategies, including structured, insurance-based and lender loss-sharing deals for this reason, and in its most recent report, their regulator and conservator indicated Fannie and Freddie will keep doing so.

"The enterprises continue to innovate and experiment with different structures and attempt to expand the scope of their CRT programs as part of their efforts to further reduce credit risk where economically sensible," the Federal Housing Finance Agency said in its report.

Meanwhile, the FHFA has started a new review of the government-sponsored enterprise capital framework and its relationship to loan pricing, but proposals to date don't appear to include any major changes that would constrain credit-risk transfer activity.

Rather, the FHFA is contemplating what appears to be a technical correction related to clean-up calls allowed when mortgage pools pay down to low balances as part of these reviews. If anything, the Mortgage Bankers Association expects this could encourage more CRT activity.

The Securities and Exchange Commission has proposed a conflict of interest rule that could potentially be applied to the process of selecting mortgages in reference pools for CRT and slow activity, but most commentators have been skeptical as to whether that will happen.

Language around the outlook for credit-risk transfer activity is cautiously optimistic in the FHFA's latest report.

"The enterprises continue to innovate and experiment with different structures and attempt to expand the scope of their CRT programs as part of their efforts to further reduce credit risk where economically sensible," the agency said.