FHFA urged not to come down so hard on credit risk transfers

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Leaders in the mortgage industry voiced concern this week that the Federal Housing Finance Agency’s capital proposal could impede the use of certain risk-sharing vehicles the government-sponsored enterprises have used broadly in the last several years. But some think there could be a simple fix.

“We believe that through relatively modest changes to the proposed capital rule, such as a lower risk-weight floor on the senior retained tranche on the CRT transaction and a lower backstop leverage ratio, the FHFA will still achieve its intended objective of a more resilient and stable GSE housing finance system that is able to withstand significant levels of economic stress,” said Andrew Rippert, CEO of secondary mortgage market investment fund Portum Trust, and a former executive at Arch Capital.

During the FHFA’s listening session held on the topic Thursday, Rippert said that a risk weight floor in the 3% range would “strike a sustainable balance” between the need to ensure the GSEs are adequately capitalized and that CRT use could remain viable.

David Gansburg, head of the global mortgage group at Arch Capital, also said during the online listening session that “minor but important adjustments” of that type could address concerns related to the proposed risk weighting for the GSEs’ retained interests in CRTs.

Of “the excessive and overlapping haircuts and adjustments that collectively treat CRT as an added risk to the enterprises rather than a risk mitigant,” the one that is “the most consequential and the least defensible” is the 10% risk-weight floor,” said Housing Policy Council President Ed DeMarco, who is a former acting director of the FHFA.

The Mortgage Bankers Association also called for a reduction in the floor during the listening session.

“We believe that the 10% risk-weight floor should be reduced significantly and targeted more narrowly.” said MBA Chairman Brian Stoffers, global president, debt and structured finance at CBRE.

Prior to entering conservatorship, the GSEs relied primarily on traditional partnerships with mortgage insurers as a means of sharing risk with the private market. There is some concern about a return to that model because ultimately some claims went partially unpaid in the wake of the Great Recession due to financial troubles some mortgage insurers had.

But the GSEs have drawn up stricter counterparty requirements for mortgage insurers since then, and have used other forms of risk sharing like structured credit risk transfer deals as well.

CRT was widely used as a way to manage risk while the GSEs were in conservatorship during the Obama administration, and like mortgage insurance it has proven to have vulnerabilities in stressed environments. Volatility introduced into the capital markets by the coronavirus’ initial arrival in the United States, for example, disrupted structured CRTs.

Stoffers said the MBA’s position in light of this was that “the GSEs should offer a diverse set of credit risk transfer mechanisms.”

While lowering the risk-weight floor for the senior retained tranche on CRT deals may sound like a simple move the FHFA may be willing to consider, there is some question as to whether it will. The agency said it would draw no immediate conclusions from the listening session.

Among considerations for the FHFA is its aim to ensure that equity investors would be comfortable that the GSEs are holding enough capital to address their risks post-conservatorship.

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Credit risk transfers FHFA GSEs GSE reform Capital requirements Risk-based capital Capital markets
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