The single-family mortgage credit risk transfer (CRT) program was created and has survived without being distorted by political influence, according to Don Layton, former CEO of Freddie Mac and current Senior Industry Fellow at Harvard’s Joint Center for Housing Studies (JCHS).
However, Layton explains his concerns for the future of the program in the third and final part of his series of papers titled “Demystifying GSE Credit Risk Transfer.”
In Layton’s view, the CRT program was created with economic efficiency rather than political agendas in mind. Because there was a lot of focus on replacing the GSEs at the time the CRT program was created, the program was able to fly under the radar in a way and was “built free from the lobbying and influence of special interests that otherwise would have attempted to force changes to their advantage.”
Also, the program was developed “inside of conservatorship” rather than through legislative action, which contributed to its more neutral agenda with a goal and outcome of economic efficiency.
The CRT program was created through the Federal Housing Finance Agency (FHFA) rather than through Congress, where it would have been subject to interest groups attempting to sway the program one way or another with white papers, conferences, private congressional meetings, testimonies at congressional hearings, and more, according to Layton.
Without these influences, the program simply served the business needs of the GSEs, rather than any political or social objectives.
However, Layton describes an influx of special interest attempts to alter the program starting about two years after its creation when it was apparent that the GSEs had undergone a major change with the successful program.
Layton describes “a seemingly never-ending series of episodes in which interest groups in Washington sought to influence the live-and-operating CRT program to their advantage.” These proposed changes would have benefitted particular interests often at the cost of the program’s efficiency and impact of reducing taxpayer risk.
Layton describes the continuation of the CRT program in its original form “against all odds” as the FHFA, and the Treasury deflected these numerous attempts.
“But staying business-like in this manner is an exception to the norms of the housing finance system, which has had decades of heavy politicization and so is known for hidden subsidies and various inefficiencies of many kinds,” Layton said in his paper.
Despite this persistence, the future of the CRT is now uncertain, and Layton says the program has finally succumbed to political pressure. Today’s FHFA Director Mark Calabria has proposed major changes for the GSEs, including a possible end for the CRT program.
FHFA’s new GSE framework, which must go through public comments and revisions, is anticipated to be finalized later this year. It includes new capital requirements for the GSEs and what Layton calls “a specific anti-CRT bias.”