The credit risk transfers used by Freddie Mac to manage distressed mortgage risk rebounded relatively quickly after stalling in 2020. That was the finding of a new report by the Federal Housing Finance Agency released on Monday.
Although the disruption of the capital markets from the pandemic, the refinancing and a new capital rule presented challenges for the CRTs, the one state-sponsored company that returned to the market after a few months of absence was able to exceed the emissions level of 2019 by the end of the year.
Freddie Mac's results suggest that the entire market could rebuild CRT protection relatively quickly if Fannie Mae returned as well.
CRTs represent portions of potential losses on loans that can be sold to private investors. This helps limit your risk if a mortgage fails. Fannie Mae and Freddie Mac stopped offering CRTs in the second quarter of 2020 due to the outbreak of the pandemic. Freddie Mac began offering CRTs again in the third quarter of last year, but Fannie Mae did not.
The total UPB reference pool of active CRTs as of February 2021 had declined from $ 3.8 trillion to $ 1.7 trillion, and the applicable risk was $ 126 billion, according to Fannie's absence and refinancing of credit from reference pools, according to Monday's report down to $ 72 billion.
"Fannie could take that risk of having her balance sheet in stock and fire her with CRT," said Ed DeMarco, president of the Housing Policy Council and acting director of FHFA from 2009 to 2014, when CRTs were first introduced at Fannie Mae and Freddie Mac.
Fannie had put the issuance of CRTs on hold as of the reporting date to assess their costs and benefits, including reducing the capital relief they provide under the FHFA's regulatory capital framework. It may conduct credit risk transfer transactions in the future.