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I N D U S T R Y I N S I G H T / J O E M E L E N D E Z
Credit risk transfer (CRT) or sharing is the process in which the
government-sponsored enterprises bundle up the mortgages they
buy from lenders and sell a portion of the risk to private investors.
Instead of the GSEs shouldering the loan risk alone, selected
investors help offset any potential risk from loan defaults. CRT
began as a test in 2012 and is now quickly ramping up as investor interest and
governmental oversight grows. Governmental oversight makes sense—we don't
want another 2007. But why are more investors becoming so interested in CRT?
Mortgage activity approached $2 trillion in
2016. Long-term, housing is the single biggest
wealth builder in America. Treated like a 401K,
it is a stable growth engine, and mortgage loans
are relatively low risk. Mortgage pools—where
thousands of loans are combined—help offset
individual loan issues and the "G-fees," which
all lenders must pay when they sell loans to
the GSEs, help to even further offset the risk.
Mortgage pools' low risk and steady growth
have attracted hundreds of investors. Investors
get solid returns, and taxpayers benefit from the
security that, if mass loan defaults occur, they
won't get hit with the bill (at least not all of it).
INTRODUCING THE FRONT-END RISK
TRANSFER
CRT typically refers to "back-end" risk
transfer where investors take on risk after
the loan is sold. "Front-end" risk transfer
per the Federal Housing Finance Agency
(FHFA) is "risk transfer [that] occurs prior
to, or simultaneous with, the acquisition of
residential mortgage loans by an Enterprise."
In plain English, it is how you reduce risk when
a loan is created before it can pollute the water
downstream.
"Front-end risk transfer" is the biggest area
of change currently. To further help explore
ideas in this area, the FHFA initiated a Request
for Information (RFI) in 2016 with the goal to
"Transfer a meaningful portion of credit risk
COMMON SIDE
EFFECTS INCLUDE…
