WASHINGTON (8/25/15)--The Federal Housing Finance Agency (FHFA) will continue to encourage Fannie Mae and Freddie Mac to transfer a significant amount of credit risk on risky loans, it noted in a report released last week.
The risk is transferred by the selling of mortgage-backed securities to private investors, which include asset managers, hedge funds, financial institutions and real estate investment trusts, among others.
According to the report, credit risk transfer is a regular part of Fannie and Freddie business, and they currently transfer a significant amount of the credit risk on almost 90% of their riskiest loans. The riskiest loans constitute roughly half of all Fannie and Freddie loan acquisitions.
Going forward, the FHFA will set specific credit risk transfer goals in annual scorecards, measured by the unpaid principal balance of mortgages with risk transferred. Fannie met 243% of its goal in 2014 and is currently at 97% of its 2015 goal of $150 billion. Freddie met 140% of its 2014 goal and is 85% toward its 2015 goal of $120 billion.
The FHFA also intends to work closely with Fannie and Freddie staff to develop and evaluate additional credit risk transfer structures.
Since the FHFA took over as conservator of both entities in 2008, it has established a goal of reducing risk exposure to taxpayers represented by credit guarantees of Fannie and Freddie. The FHFA’s 2012 “Strategic Plan for Enterprise Conservatorships” first proposed the use of what it called “loss sharing agreements” to reduce credit risk, and the first packages were sold in 2013.