Alternative Structures for Investment in Credit
and Operations in MBS Securitization

Abstract

This article examines the role of Fannie Mae and Freddie Mac (the GSEs) across a wide range of activities related to securitization as a vehicle for housing finance, with focus on a few key aspects that are undergoing a transition. The two main categories of GSE participation are their role as investors and their role in securitization operations. As the GSEs experiment with attracting private capital via structured products and insurance-based models to invest in mortgage credit risk, the author proposes two alternative models using the respective channels. The objective is to show a path to attract a wide base of investors at the “front end” so that risk taking by other players happens simultaneously with GSE securitization and shifts some operational burden of securitization from the GSEs to the private sector. The author explores the economics of recent risk transfer transactions in light of the guarantee fees charged by the GSEs for their overall role in securitization and offer insights about further participation of private entities in other operational roles. One such role is the post-securitization credit risk management that the GSEs perform. Going forward, risk-sharing arrangements with the private sector leave the investors facing credit risk, in addition to mortgage-backed security holders, dependent on the efficiency of such service provided by the GSEs in a principal/agent framework.