ABA Calls for Innovation, Transparency in Risk Transfer Methods

ABA today responded to the Federal Housing Finance Agency’s request for comments on the credit risk transfer mechanisms being developed by Fannie Mae and Freddie Mac. Credit risk transfer promises to transform and improve the business practices of the GSEs by bringing more private sector investors into the secondary mortgage market and transferring much of the risk that is currently being borne by U.S. taxpayers — two goals that ABA has long advocated.

ABA evaluated the GSEs’ proposed methods for front-end credit risk transfers — that is, scenarios in which the risk transfer occurs prior to or simultaneous with the acquisition of a residential mortgage. Among the proposed methods were “deep” mortgage insurance and collateralized recourse arrangements. The association stressed that any new credit risk transfer mechanisms adopted by the GSEs must provide equal access and a level playing field for participants of all sizes, as well as greater transparency to ensure that the mechanisms developed are truly workable and understood.

ABA also urged FHFA to ensure that any method adopted by the GSEs not add additional complexity or cost for borrowers or loan originators. The association echoed similar comments in a joint letter with five other mortgage and financial trade groups on the proposal.

“Credit risk transfer, when done correctly, reduces taxpayer risk and brings greater involvement of private capital to the secondary mortgage market,” said ABA President and CEO Rob Nichols. “ABA encourages FHFA and the GSEs to continue to innovate and experiment with new forms of credit risk transfer, but to do so cautiously so as not to undercut already successful, established CRT mechanisms and to ensure that new mechanism are equally available and economically sensible for all banks who want to participate.” For more information, contact ABA’s Joe Pigg.