U.S. Reps. Steve Stivers (R-Ohio) and Gwen Moore (D-Wisconsin) have written a letter to FHFA Director Mel Watt urging him to consider additional credit risk-sharing techniques for Fannie Mae and Freddie Mac that are consistent with federal housing goals outlined in the Conservatorship Scorecard.
The Representatives praised FHFA’s efforts to increase the participation of private capital in the mortgage market to date, but noted a lack of balance between “front end” and “back end” risk sharing. The majority of the GSEs’ credit risk transfer activity subject to Scorecard measurement to date has been of the back end variety, meaning it occurs after the GSEs purchase or guarantee a loan or pool of loans and assume the related credit risk. With front end risk sharing, the lender/seller retains a portion of the risk by obtaining private mortgage insurance to provide default loss protection and borrower equity before the GSEs purchase/guarantee a loan or pool of loans.
Stivers and Moore inquired of Watt’s plans to incorporate more front end risk sharing into the GSEs’ credit risk transfer activities, stating several reasons why they believe this is important:
- Front/back end balance: According to the FHFA’s Overview of Fannie Mae and Freddie Mac Credit Risk Transfer (CRT) report, 90 percent of the GSEs’ risk sharing has been back end. “We would like to better understand FHFA’s expectations regarding how credit risk sharing will be apportioned and the criteria used for apportionment,” Stivers and Moore wrote.
- Borrower and lender benefit and participation: The CRT report does not describe how all borrowers and lenders will benefit or participate in the GSEs’ credit risk sharing activities, nor does it say whether “FHFA considers this an important factor in determining the relative desirability of credit risk sharing mechanisms.”
- Durability of credit risk sharing capacity: Stivers and Moore note that the assessment of relative durability of front and back end risk sharing will be difficult “without ensuring substantial volumes within each approach” prior to any material change to the housing price cycle.” The Representatives inquired as to whether the FHFA envisions some proportionality between front and back end risk sharing approaches so that an appropriate point of comparison with regard to available risk sharing capacity can be obtained.
- Larger housing finance reform considerations: The FHFA's conservatorship of the GSEs is now in its eighth year, and comprehensive finance reform continues to be a hot button topic among lawmakers and stakeholders in the housing industry, and one of the issues at the heart of the matter is how willing other market participants will be to take on the multiple roles performed by the Fannie Mae and Freddie Mac. Stivers and Moore exhorted Watt in the letter to consider creating housing finance reform alternatives as part of FHFA's goals, especially if front end risk sharing makes mortgages more affordable, provides better protection for taxpayers, and is consistent with other conservatorship goals.
Click here to view a complete copy of the Stivers-Moore letter to Mel Watt.