Fannie Mae-No Politics (FNMA)

[imtheshadow]

Found the TH post on CRT's ... bottom line ... they MIGHT be needed in worst-case scenarios (like a pandemic), but otherwise they are not cost-effective and must be purchased in advance or they become counter-cyclical (i.e., can't buy home insurance to cover a fire after the fire) ... my layperson's take is that if relied upon too much for capital reserves, they'll be expensive and rarely used


https://howardonmortgagefinance.com/2020/05/05/first-quarter-takeaways/

9 paragraphs in:

I’ve been a persistent critic of Fannie and Freddie’s credit-risk transfer programs, arguing that the companies were greatly overpaying for the right to transfer credit losses they were highly unlikely to incur. Up until late March, when social distancing took effect, that indeed seemed to be the case. For the past three years, the credit loss rate on Fannie’s post-2008 mortgages—which today account for 95 percent of its total book—has averaged a mere 2.0 basis points per year, and in 2019 it was only 1.7 basis points. Last year Fannie paid over $1.6 billion for risk transfers that generally don’t activate until cumulative losses as a percentage of the initial insured pool balance exceed 50 basis points (25 times the 3-year annual average of the post-2008 book), and they cover these pools for more than 400 basis points of cumulative losses (over 200 times the current 2.0 basis point annual loss rate). But now we have the pandemic, and in a worst-case scenario many of these risk transfer arrangements would pay off, to the great shock and dismay of the institutions and investors on the other side of them.