"Fannie’s CAS program has never been economic, but it’s now a charade. The company seems to have set an average initial pool cost it will accept (although the cost of individual CAS issues can vary considerably), and it keeps as much of a mortgage pool’s credit risk as it has to in order to sell CAS at that price, with the percentage of transferred credit losses being the variable. There is not even a pretense of these issues being effective or efficient.
This, of course, is not Fannie’s fault; it is another stupefying consequence of the company’s conservatorship under FHFA. The former director of FHFA, Mark Calabria, has admitted that CAS are a “looting” of Fannie, yet knowing this, the current director, Sandra Thompson, continues to use both carrots (capital credits) and sticks (CRT issuance goals that reduce executive compensation if not met) to encourage CAS and STACR issuance, even as the costs of these deals soar and their benefits dwindle, making the looting even greater.
The only explanation for FHFA’s passivity in the face of the CAS charade is the same as for its passivity in addressing the inconsistency between the results of its recent Dodd-Frank stress tests and its regulatory requirement that Fannie and Freddie hold 3.0 percent capital before they can be released from conservatorship: the current FHFA leadership will not make any significant change to the status quo for the companies—no matter how obvious, urgent or desirable—unless or until it is directed to do so by some other institution or individual, whether Congress, Treasury, or a very senior economic or policy official in the administration. In the meantime, the losses from their CAS and STACR programs will slow the growth of Fannie and Freddie’s retained earnings, while the reduced capital credit given to their much less efficient new CRT issues will be a headwind against filling their capital gaps, by causing their risk-weighted assets to rise at a faster rate than their total assets."
