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Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules
rulemaking. Consider the following inputs from an illustrative CRT:
$1,000 million in unpaid principal balance of performing 30-year fixed rate single-family mortgage exposures with original loan-to-values OLTVs greater than 60 percent and less than or equal to 80 percent;
CRT coverage term of 10 years;
Three tranchesB, M1, and AH
where tranche B attaches at 0% and
detaches at 0.5%, tranche M1 attaches at 0.5% and detaches at 4.5%, and tranche AH attaches at 4.5% and detaches at 100%;
Tranches B and AH are retained by the Enterprise, and ownership of tranche M1 is split between capital markets 60 percent, a reinsurer 35
percent, and the Enterprise 5 percent;
The aggregate credit risk-weighted assets on the single-family mortgage
exposures underlying the CRT are $343.8 million;
Aggregate expected losses on the single-family mortgage exposures underlying the CRT of $2.5 million; and The reinsurer posts $2.8 million in collateral, has a counterparty financial strength rating of 3, and does not have a high level of mortgage concentration risk.

Figure 3: Single-family CRT Example 100%

4.5%

Aggregate Expected Ownership:

Losses: 0.25%

Tranche AH: 100% retained in solid gray.
Tranche M 1: 60% to capital markets gray grid lines, 35% reinsured in gray diagonal lines, and 5% retained in solid gray.

The Enterprises would first calculate risk weights for each tranche assuming full effectiveness of the CRT in transferring credit risk on the underlying mortgage exposures. In general, tranche risk weights are the highest for the riskiest, most junior tranches such as tranche B, and lower for the more senior tranches such as tranches M1 and AH. The proposed rule would lower risk weights on senior tranches compared to the current ERCF.

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For the illustrative CRT, the overall risk weights for the proposed rule across tranches AH, M1, and B are 5%, 783%, and 1,250%, where 5% reflects the proposed minimum risk weight. By comparison, the overall risk weights under the ERCF across tranches AH, M1, and B are 10%, 785%, and 1,250%, where 10% reflects the minimum risk weight. The difference between the M1
risk weights, 783% for the proposed rule and 785% for the ERCF, reflects a
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weighted average risk weight calculation for M1 because M1s attachment and detachment points straddle stress loss. That is, the weighted-average risk weight would be the average of 1,250 percent, weighted by the portion of the tranche exposed to projected stress loss, and the minimum risk weight 5 percent for the proposed rule and 10 percent for ERCF weighted by the portion of the tranche not exposed to projected stress loss.

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Tranche B: 100% retained in solid gray.