Mortgage credit risk transfer (“CRT”) is an important component of the U.S. housing finance system. Under conservatorship of the Federal Housing Finance Agency (“FHFA”), Fannie Mae and Freddie Mac (together, the Government Sponsored Enterprises or “GSE”s) have come to market with various structures to transfer mortgage credit risk to both investors, via securities offerings (“Capital Markets execution"), and reinsurers, via insurance offerings (“Reinsurance execution”). Reinsurance of the monoline mortgage guaranty insurers has also become an important part of the CRT landscape.
The COVID-19 pandemic is shifting all facets of the economic landscape including CRT. This panel will explore the implications of the evolving pandemic on mortgage CRT by addressing the following questions:
• Economic conditions have changed drastically during the unfolding pandemic. What will mortgage performance look like in light of these shifting economic conditions and why should this differ from performance during the Global Financial Crisis;
• Unprecedented government assistance including the CARES Act has been deployed to stem the economic challenges. What impact will the various borrower assistance programs have on projected mortgage performance and CRT;
• Temporary loan forbearance has been widely utilized for borrowers facing financial hardship, with such loans being treated as delinquencies. What are the implications for CRT transactions and for mortgage insurer capital requirements;
• The GSEs have been meeting the majority of their CRT capacity with capital markets executions and the monoline mortgage insurers have also tapped both the reinsurance and capital markets for protection. How might dislocations in the capital markets including reduced CRT bond liquidity impact the demand for CRT reinsurance capacity from the GSEs and mortgage insurers; and
• While not related to the pandemic, the FHFA recently reproposed a capital rule for the GSEs. What is the potential impact of this rule on the GSEs and how might it affect CRT programs in the future?