Shrinking the Footprint of Fannie Mae and Freddie Mac

Abstract

This workshop focused primarily on the recent risk-sharing transactions executed by Fannie Mae and Freddie Mac and briefly on future plans to restructure the government-sponsored enterprises (GSEs). The year 2013 has been one of experimentation, with the Federal Housing Finance Agency’s encouragement of both enterprises to do risk-sharing with private capital by using two basic forms: 1) insurance-based risk transfer and 2) capital-market-based solutions. By design, the core structures of Fannie Mae’s Connecticut Avenue Securities (CAS) and Freddie Mac’s Structured Agency Credit Risk (STACR) transactions are closely matched, with similar synthetic structures and similar attachment and detachment points. Credit ratings are important for these transactions to build a broad investor base. The enterprises will do more experiments with risk-sharing models such as having placing some or all of the risk of actual losses with investors, reinsurance, and more traditional lender recourse While there is legislative consensus on a few major points—eliminate the GSEs, preserve the TBA (to be announced) market, place private enhancement in a first-loss position, and have a catastrophic government guarantee behind it—crafting a GSE reform plan that passes muster with a broad constituency is more difficult and unlikely before the 2016 elections.

TOPICS: MBS and residential mortgage loans, financial crises and financial market history