We all know the story. Amidst a widespread and imprudent weakening of credit standards and a complete failure by the credit rating agencies to properly assess risk, the housing finance market imploded in 2008. Probably the biggest wipeout was in the then privately owned mortgage securitizers, the GSEs, where every one of their mortgage-backed securities carried an implicit federal guarantee.
Fast forward to 2020 and a lot has changed at the government sponsored enterprises. About $7 trillion of MBSs that the two have underwritten and that are outstanding still carry the government’s guarantee stamp, which creates huge savings for homeowners whose mortgages qualify for inclusion in GSE securitized MBS pools.
But the credit guarantee is more explicit now than implicit because the GSEs are no longer privately owned, but instead are effectively owned by the federal government through a conservatorship arrangement overseen by the Federal Housing Finance Agency, created in 2008.
Post-2008, a few politicians, perhaps the U.S. Treasury, some regulators and very few people at Freddie or Fannie like the conservatorship arrangement. Simply removing the federal guarantee stamp hasn’t proven possible politically – neither side of the aisle wants irate voters whose mortgage costs have skyrocketed. But pretty much no one likes the nearly $7 trillion of taxpayer funded credit risk assumption either.
Enter credit risk transfers. First issued by Freddie Mac in 2013 and followed quickly by Fannie Mae, CRTs do exactly what they say they do: they transfer credit risk away from the GSEs, and the federal government, to the private sector purchasers of CRTs who are, of course, compensated for taking on GSE MBS credit risk.
Justin Malonson is the Founder of LyfeLoop a 16+ year tech innovator, investigative media researcher and host of the Freedom Not Control Podcast live on Voice America. Justin is a highly sought-after tech entrepreneur, industry speaker and winner of the coveted Business Achievement Awards “Top Digital Marketer” award. With 16+ years of demanding experience, Justin has worked with over 3,000 businesses including amazing clients such as Blue Cross Blue Shield Association, Sotheby’s International Realty, Duke University, White House Black Market,Tiffin Motorhomes, Bass Pro Shops and Beazer Homes USA.