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Federal Register / Vol. 86, No. 184 / Monday, September 27, 2021 / Proposed Rules
as stated above, many commenters stated that a binding leverage ratio would be a disincentive for CRT and encourage the Enterprises to take on more risk.

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B. CRT
Background The Enterprises core businesses reflect the acquisition of mortgages from financial institutions and the bundling of those mortgages into collateral for MBS. The Enterprises sell to investors part of the cash flows that stem from the mortgages underlying the MBS. The Enterprises guarantee the principal and interest payments to investors and collect a guarantee fee from their sellers.
Mortgage exposures typically carry both interest rate and credit risk. In general, the Enterprises transfer mortgage interest rate risk and retain and manage mortgage credit risk. The interest rate risk on securitized mortgages is transferred to investors through MBS sales. The Enterprises principal and interest guarantee helps to create a liquid and efficient MBS
market. It also limits the credit risk assumed by MBS investors, except for an investors counterparty exposure to the Enterprises. Credit risk can be broadly separated into expected losses and unexpected losses, as determined by a credit model. The Enterprises rely on guarantee fees to cover expected losses and, absent CRT, equity capital to cover unexpected losses.
In its role as conservator, FHFA
established a goal of reducing taxpayer risk exposure to the credit guarantees extended by the Enterprises. To accomplish this objective, FHFA used its conservatorship strategic plans and scorecards to encourage the Enterprises to transfer credit risk to the private sector. In 2012, FHFAs Strategic Plan for Enterprise Conservatorships proposed the use of loss sharing agreements to reduce the credit risk incurred by the Enterprises. The 2013
Conservatorship Scorecard required each Enterprise to demonstrate the viability of multiple types of credit risk transfer transactions on singlefamily loans. The Enterprises first implemented their CRT programs that same year and have since transferred to private investors a substantial amount of the credit risk of new acquisitions the Enterprises assume for loans in targeted loan categories. The programs have become a core part of the Enterprises single-family credit guarantee business and include or have included CRTs via capital markets issuances both corporate debt and bankruptcy remote trust structures, insurance/reinsurance
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transactions, senior/subordinate transactions, and a variety of lender collateralized recourse transactions.
The 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac emphasized the desirability of greater use of CRT in the future. Additionally, the 2014 and 2015
Conservatorship Scorecards set more ambitious CRT performance goals for each Enterprise. Since that time, the Conservatorship Scorecards have included various goals to ensure the continued use of CRT as a means of reducing risk exposure to taxpayers. For example, the 2016 through 2019
Conservatorship Scorecards established an objective for the Enterprises to transfer a meaningful portion of credit risk on at least 90 percent of the unpaid principal balance UPB of their acquired single-family mortgage loans targeted for credit risk transfer. Targeted loans include fixed-rate, non-HARP
loans with terms over 20 years and loanto-value LTV ratios above 60 percent.
Such loans represent a substantial amount of the credit risk associated with all new loan acquisitions.
From the beginning of the Enterprises single-family CRT programs in 2013
through the end of 2020, Fannie Mae and Freddie Mac have transferred a portion of credit risk on approximately $4.1 trillion of UPB, with a combined risk-in-force RIF of about $137 billion, or 3.3 percent of UPB.11
The Enterprises CRT programs have evolved over time in response to changing macroeconomic conditions, loan acquisition risk profiles, and views of expected and unexpected losses.
However, across the different types of CRT vehicles, the basic transaction is the same: An Enterprise pays private market participants to assume credit risk in a severe stress scenario on mortgages the Enterprise guarantees, where the severe stress scenario is generally comparable to the 2008 global financial crisis. Further, to ensure alignment of interests with investors, the Enterprises retain at least 5 percent of the risk exposure sold in their CRT
transactions. This is referred to as vertical risk retention.
The Enterprises have developed their various CRT products in order to meet certain program goals established by FHFA in 2012. Among these goals is that CRT transactions should be economically sensible, repeatable, scalable, and structured to not disrupt the efficient operation of the To Be Announced TBA market which 11 Credit Risk Transfer Progress Report 4Q20, https www.fhfa.gov/AboutUs/Reports/
ReportDocuments/CRT-Progress-Report-4Q20.pdf.

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provides the market with benefits including allowing borrowers to lock in rates in advance of closing. The widespread use of TBA trading has contributed significantly to the liquidity and efficiency of the secondary market for single-class MBS. A misconception is that economically sensible implies low-cost on an absolute basis. However, the costs of CRT should be evaluated relative to the cost of equity capital needed to self-insure the risk. To be economically sensible, an Enterprise should consider executing CRT
transactions when the cost to the Enterprise for transferring the credit risk does not meaningfully exceed the cost to the Enterprise of self-insuring the credit risk being transferred. Market conditions in addition to a transactions cost and structure ultimately determine a CRTs relative profitability, but if CRT
premium payments are low relative to the capital reduction provided by the CRT, then the Enterprise has the opportunity to execute economically sensible CRT transactions, and CRT may provide taxpayer protection at a lower cost than equity capital.
A further goal was to develop different types of products to provide for the broadest possible access to investors with the expectation that at least some of those investors would remain in the market through all phases of a housing price cycle. Since the inception of the programs in 2013, the types of single-family CRT transactions have included structured capital markets issuances known as Structured Agency Credit Risk STACR for Freddie Mac and Connecticut Avenue Securities CAS for Fannie Mae, insurance/
reinsurance transactions known as Agency Credit Insurance Structure ACIS for Freddie Mac and Credit Insurance Risk Transfer CIRT for Fannie Mae, front-end lender risk sharing transactions, and senior/
subordinate transactions.
Most of the RIF has come from capital markets issuances STACR and CAS.
These securities were initially issued as direct debt obligations of each Enterprise; however, in 2018, both Enterprises transitioned their capital markets CRT issuances to a Trust structure with the notes being issued by a bankruptcy remote trust created for each individual CAS or STACR
transaction. The proceeds from the sale of the notes are deposited into the bankruptcy remote trust and there is no direct counterparty exposure to the Enterprises for investors. By implementing the Trust structure, the Enterprises are now able to benefit from insurance accounting treatment for their capital markets CRT transactions.

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