3įannie Mae mitigates the credit risk on the loans backing its mortgage backed securities by several means. The credit risk on such Securities is guaranteed by Fannie Mae, so investors are protected from the risk that the mortgage borrowers might default-covering any shortfall in the principal and interest due from the mortgages underlying these Securities. After banks and brokers originate home mortgages, they sell them to Fannie Mae-which in turn packages these mortgages and offers them to investors as Mortgage Backed Securities. Here is a brief summary of CRTs, which are built on top of the existing structure for governmental securitized mortgages. Nevertheless, we believe that Fannie Mae should increase the amount of credit risk it transfers to CRT investors and the guarantee fees charged by Fannie Mae to mortgage originators should be based on the implied guarantee fee paid to CRT investors.
We applaud Fannie Mae’s efforts to date, especially those to expand the investor base for CRTs by adopting a better tax structure. It has already issued more than $30 billion of CRTs through this program-transferring risk on over $1 trillion of unpaid principal balance back to the private market. The program transfers to private investors a substantial portion of the credit risk on loans backing the mortgage backed securities. The largest initiative has been Fannie Mae’s Credit Risk Transfer (CRT) program, known as Connecticut Avenue Securities (CAS) 2. Hence, the onus of reducing taxpayer risk, within the current mortgage market, has been left to the initiative of the GSEs. At the other end of the spectrum, some Democrats want to treat GSEs as public utilities owned or regulated by the federal government. At one end of the spectrum, some Republicans have called for the re-privatization of the GSEs, on the assumption that the mortgage market could function without any government guarantee. So, Congress is not likely to muster a bipartisan majority to pass any of the proposed legislative reforms. Yet, public officials still endorse government subsidies to help achieve the social benefits of home ownership.
After the financial crisis of 2008, taxpayers have rebelled against bailing out financial firms in the mortgage market.
These statistics raise important policy questions about the US government’s role in supporting the home mortgage market during normal times and in housing recessions. While today’s outstanding balance of single-family mortgage debt is slightly below the 2008 peak of $11 trillion, the portion of the new home mortgages guaranteed by government sponsored enterprises (GSEs) and related federal agencies now exceeds 70 percent, as compared to approximately 35 percent in 2006 1. Since the financial crisis, the federal government has vastly expanded its role in backing the residential mortgage market.
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