TH's response yesterday from the financial intermediaries that don't want to give up the $14.95B and counting CRT program: "Mike–As you know, Fannie and Freddie’s relative lack of capital is the result of FHFA and Treasury having required them to remit all of their earnings to Treasury starting in 2013. The taxpayer has fared quite well from that arrangement, and will continue to do so even should the Supreme Court take the first step in reversing the net worth sweep with a ruling favorable for plaintiffs on the APA issue in the Collins case.
Beyond that, I simply disagree with your statement that “if Fannie and Freddie take risk, it could quickly become taxpayer exposure.” As I noted in my post, the companies’ losses on their 2004-2008 books were outliers, caused by the last attempt by their opponents to replace them with “private sector alternatives”–in that instance, private-label securitization. Excluding those years, Fannie’s credit losses have never exceeded 11 basis points as a percent of their owned and guaranteed mortgages, even in recession years. Fannie could cover that loss rate almost four times over with its current average guaranty fee (net of TCCA fees) of 44.5 basis points. So, no, it doesn’t make sense, even with the low level of capital the companies now have, to “distribute rather than concentrate that risk on their balance sheets,” particularly if doing so is almost guaranteed to cost them money. What sensible business pays to give profitable business to someone else?
I don’t have any great ideas for how to fix securitized CRTs to make them economic for the companies to issue, although perhaps the investment bankers can come up with something. On the issue of capital credit for CRTs, I have suggested many times to many people that they need to come up with an analytically sound measure of “equity equivalency,” that makes $X of (contingent and limited) CRTs the economic equivalent of $Y of upfront equity. So far, no one has been able to do that."
