CRT: A Means to an End Despite Lack of Housing Reform
This article was originally published on the GoRion blog. As we look forward to 2017 and the critical issues facing the nation’s housing finance system, one of the paramount matters will be the ongoing development of the Credit Risk Transfer (CRT) initiative. The Federal Housing Finance Agency (FHFA) and the two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, have enjoyed many CRT successes in their goal to de-risk the government. Earlier in 2016, FHFA released a request for information (RFI) to determine the next steps for the CRT activity. The principles listed on Credit Risk Transfer are:
- Reduce Taxpayer Risk
- Make Economic Sense
- Ensure Continuity of Core Business
- Create Repeatable Transactions
- Be Scalable
- Ensure Counterparty Strength
- Appeal to a Broad Investor Base
- Promote Stability through economic and housing cycles
- Ensure Transparency
- Provide a Level Playing Field
The 30-Year FRM ChallengePart of the challenge to housing reform is how to satisfy the requirement to maintain the 30-year fixed rate mortgage market. This has created much debate on the value to consumers around the 30-year fixed rate mortgage and the importance of a healthy forward trading market. The government guarantee remains a key driver of success in the global capital markets. A 30-year mortgage and healthy “to be announced” (TBA) market has been the backbone to liquidity, standardization and scale in years past. Yet, a 30-year fixed rate mortgage is not an attractive instrument to put on the balance sheet of a bank. Therefore, finding a path to preserve this in the face of housing reform remains a high priority. There are a number of questions being asked across the industry and within the United States Congress.
- Is it necessary to have a government guarantee on mortgages for investors?
- Will the government adequately price credit risk?
- Is there enough private capital available to place in front of the government guarantee?
- Is private capital alone enough for a functioning market?
- Will private capital stay in the market in volatile times?