GSEs in favor of retaining CRT strategies, g-fee parity post-reform

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Government-sponsored enterprise executives say they want to continue to offer credit risk transfers and guarantee-fee parity after the GSEs are released from conservatorship, but they might not be able to.

"If reform goes a certain way and credit risk transfer is not recognized as a benefit or a credit that would, of course, influence our ability to be able to do those kinds of benefit programs," Kevin Palmer, senior vice president of single-family portfolio management at Freddie Mac, said in response to a panel discussion question at the Mortgage Bankers Association's National Secondary Market Conference.

However, odds are Freddie Mac would continue to pursue the CRT strategies used during conservatorship even if GSE reform occurred, he said.

Freddie was using credit risk transfers to lay off risk even before it was a formal regulatory scorecard goal, Palmer noted.

And while GSE reform may put an end to some conditions unique to conservatorship that CRTs address, such as the lack of a sufficient capital reserve buffer, other motivations to use the strategy are likely to persist.

For example, so long as Freddie continues to be a real estate-focused company that lacks diversification options, it could benefit from alternate ways to lay off risk like CRT strategies.

The adjustment in g-fee pricing the GSEs made during conservatorship to ensure larger players don't get volume discounts also has benefits the GSEs would like to preserve, said Renee Schultz, senior vice president in Fannie Mae's capital markets division.

"It is a more even playing field between the small and the large," Schultz said. "We do think that is important."

Smaller mortgage lenders have been concerned that g-fee parity could be rolled back under GSE reform.

Even with g-fee parity in place, smaller mortgage lenders who sell loans to the GSEs have lost ground to bigger players recently due to consolidation.

The Federal Housing Finance Agency's latest annual single-family g-fee study shows smaller lenders ceded 7% of their market share to top-five lenders between 2016 and 2017.

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