Fannie Mae-No Politics (FNMA)

[GAK-]

The FHFA listening session on CRT was good stuff, but basically a summary of many of the points already made in the comments submitted.

It makes no sense why they would not provide credit for at least some forms of CRT, especially those that have "Nil Reimbursement Risk" (cf. pp. 7-8 from the paper linked below). In these transactions, the providers of CRT basically put cash in an independent escrow account to draw from in the event of a default. In the words of Don Layton: "So...the principle amount of the bond functions as a pool of cash, paid up-front" by the initial investors purchasing the bonds at the inception [of the CRT product], equal to 100% of the maximum reimbursement the GSE's might be owed for losses. The CRT investors get some portion of their original principle amount back years later, at the maturity of the bond, after reduction by the defined cumulative losses they have reimbursed to the GSE's"

He goes on: "A simplified example will help. Assume there is a pool of $1 billion of mortgages and a CRT bond has been issued that is designed to cover cumulative lose from 0.10% of principal to 4.00% of principal
of that pool. (In this case, 0.10% is known as the “attachment point” and 4.00% as the “detachment point.) That means the principal amount of the STACR bond to be issued will be $39 million: 3.9% (i.e.
the 4.00% less the 0.10%) of the $1 billion principal amount of the mortgages in the pool. This amount is paid upfront by CRT investors and deposited with a trustee. As losses are incurred by the GSE on the
specific $1 billion worth of mortgage loans in the reference pool, the trustee sends the GSE the funds to reimburse those losses. Then, when the STACR bond matures, the bondholders get back the original $39 million less the cumulative total of the losses reimbursed, which still will be sitting with the trustee. If losses above the attachment point have been very low (e.g., $4 million), the investors will get back $35
million or so; if losses have been very high, the investors may even get back nothing" (p. 8)

So with the Nil Reimbursement Risk requirement, the CRT investors are basically stocking away CASH in the required amount of the 4% ratio currently being required by the FHFA. Yet the FHFA does not want to count that 4% as 4%. Instead, the GSE's are being asked to keep ADDITIONAL capital over and above that provided in the escrow accounts by the CRT.

I'm not sure how many of these CRT transactions have this Nil Reimbursement Risk built in, or what the barriers are for CRT investors to provide this up-front cash. But for every CRT transaction done by the GSE's there should be a significant reduction in their required capital to be retained on their books.

https://www.jchs.harvard.edu/sites/default/files/harvard_jchs_gse_crt_part2_layton_2020.pdf