Wanda DeLeo, the deputy director of conservatorship at the Federal Housing Finance Agency, testified last month before the Senate Banking Committee on Fannie Mae and Freddie Mac’s recent credit risk transfer activities.
DeLeo said the program, which seeks to provide “alternative funding mechanisms that place less potential burden on taxpayers” in the event of economic downturn, focused primarily on pre-funded capital markets transactions and insurance or guarantee agreements. “
“This year, each enterprise has sold debt securities that transfer to private investors a portion of the credit risk of a large reference pool of single-family mortgages that the enterprise had previously securitized,” DeLeo said.
Freddie completed two transactions in 2013 involving Structured Agency Credit Risk securities, and Fannie completed one Connecticut Avenue securities deal.
“Each transaction provides credit protection to the issuing enterprise by reducing the principal on the debt securities as credit performance of the reference pool deteriorates,” DeLeo said.
Additionally, in October, Fannie executed a pool insurance policy that transfers part of the credit risk on a pool of single-family mortgages securitized by the GSE in the fourth quarter, and in November, Freddie engaged in a transaction that transferred part of the residual credit risk retained on the pool of mortgages underlying its first STACR transaction.
“The Enterprises have made major steps in risk transfer this year,” DeLeo said. “If sufficiently scalable, these transactions provide mechanisms to free taxpayers from shouldering almost all the burden of mortgage credit risk and place that risk in the private sector. We will, with the Enterprises, continue to explore new techniques or variations on those already tried to find the most workable solutions and those that show the best promise of reducing the Enterprises’ footprint, consistent with maintaining efficient and effective mortgage markets.”