As the Chief Legal Officer for Digital Risk, Debbie K. Hoffman oversees the operation of Digital Risk’s legal, compliance, risk and licensing functions. Debbie is responsible for corporate governance, legal compliance of subsidiaries and lines of business, preparation and negotiation of legal agreements, legal regulatory issues and evaluating the company’s exposure to risk. Debbie advises the company on a wide variety of legal issues and directs the company’s outside counsel. In addition to her corporate legal duties. Debbie recently spoke with DS News about the challenges of compliance and the GSEs' transfer of risk from the taxpayers to the private market.
What new challenges are those in the mortgage industry facing in the area of compliance?
Whether an entity is a bank or a non-bank, a mortgage originator, lender, transferee, servicer or somewhere in between, whatever the role, there are many applicable regulations. Regulation of the mortgage industry has exploded since the housing market crash of 2008 and the enactment of the Dodd-Frank Act in 2010. Now, anyone and everyone who participates in the mortgage industry is regulated by one or more federal agencies, and the regulations they implement are complex and unforgiving. Therefore, every industry participant faces new compliance challenges. While the regulations differ depending on the characteristics and role of the firm, there are certain compliance challenges that are common among all regulated entities.
How do you think the GSEs are doing as far as transferring risk from the taxpayers to the private market? What more, if anything, needs to be done?
Under the conservatorship of the FHFA, since 2013 Fannie Mae and Freddie Mac have intensified their efforts to introduce more private capital to the secondary mortgage market and thereby transfer risk from taxpayers to the private market. The GSEs have traditionally used two methods of transferring risk—credit risk transfers (CRTs) and credit insurance risk-sharing programs.
CRT transactions are comprised of securities that are designed to allow the GSEs to share the credit risk on a portion of their strongest performing business. These types of transactions provide for a layer of defense against loss to taxpayers and Fannie Mae and Freddie Mac, while also reducing the GSEs participation in the mortgage market and increasing private investor participation. Fannie Mae and Freddie Mac launched their first CRTs in 2013. Since then, credit risk transfer transactions have become increasingly popular among investors who are looking for more risks and higher yields.
In response to this success, at the end of last year Fannie and Freddie began to explore further CRT alternatives. Some of these new deals transfer the first loss sustained when a homeowner stops making payments, which goes much further in reducing the risk exposure of taxpayers, as Fannie and Freddie’s former CRTs required losses to reach a threshold before the GSEs received funds to cover them. This is a step in the right direction toward further improving risk-transferring methods, and the GSEs may be exploring other types of transactions to increase the success of these types of programs.
Another avenue of risk-sharing the GSEs have utilized is deals with credit insurance risk sharing. These deals shift credit risk on a pool of loans to an insurance provider who then transfers that risk to one or more reinsurers. This medium of risk-sharing has not been as widespread and successful as CRTs, but it has great potential. GSEs should, like they have done with CRTs, explore other options for these programs and expand their efforts to increase awareness of the programs among insurance providers and private investors.