Senate Banking on Transferring Credit Risk
AT
DECEMBER 10TH’S SENATE BANKING COMMITTEE HEARING, lawmakers discussed the
fundamentals of transferring credit risk in a future housing finance system.
Specific attention was paid to the recent deals conducted by Fannie Mae and
Freddie Mac.
Opening
Statements
In
their opening remarks, Chairman Tim Johnson (D-S.D.) briefly overviewed prior
hearings and made mention of other panelists remarks regarding the need for a
housing finance system backed by a government guarantee and private capital.
Johnson stated the need for TBA compatibility with future credit risk
transactions. Ranking Member Mike Crapo (R-Idaho) stated “I welcome the
perspective our witnesses have on potential risk transfer options that could be
used to attract private capital to take this first loss position, including the
benefits and tradeoffs of each option. In particular, I am interested to hear
your views on which risk transfer mechanisms could bring in an appropriate
amount of private capital, while prioritizing taxpayer protection to the
fullest extent possible.”
Witness
Testimony
Kevin Palmer, Vice President at Freddie Mac,
in his prepared testimony
discussed Freddie Mac’s recent Structured Agency Credit Risk (STACR) Debt Notes
risk sharing transactions and outlined future risk sharing plan. In terms of
future transactions Palmer stated, “The first (options) is risk retention by
mortgage originators who sell mortgages to us through recourse agreements. The
key challenge to recourse transactions is that sellers retain these obligations
on their balance sheets. This has regulatory capital consequences for regulated
financial institutions. A second option we are exploring is a
senior-subordinate securitization. While doing this type of securitization
would not allow for TBA securitization on these loans under current rules, this
structure is common, particularly for jumbo and other nonconforming loans.
Laurel
Davis, Vice President at Fannie Mae, in her testimony
discussed how Fannie Mae structured and brought to market their credit risk transfer
transaction called Connecticut Avenue Securities (CAS) this year. Davis
stressed that the mortgage insurance industry is currently capital constrained.
Davis stated “Pricing might need to rise considerably in connection with
possible future transactions, unless the MI industry is able to raise new
capital.”
Ted
Durant, Vice President of Analytic Services at Mortgage Guaranty Insurance
Corporation, in his testimony
stated the need for the private mortgage insurance model to be a fundamental
component of a new housing finance system. Durant discussed possible
improvements for S. 1217 which included clarifying the distinction between
mortgage insurance and bond insurance. Durant suggested allowing for both
loan-level and pool-level mortgage insurance, and limiting bond insurance to
its traditional role of guaranteeing timely payment of principal and interest
to bondholders in the event of failure of the issuer, relying on other,
first-loss credit enhancement to ensure that the bond guarantor is in a remote
risk position.
Sandeep
Bordia, Head of Residential & Commercial Credit Strategy at Barclays
Capital, specifically discussed the STACR and CAS credit-linked deals in his testimony.
Bordia included discussion of the buyer base and market appetite for such
issuance and factors that could bring changes to those points. Bordia stated
that one reason the transactions succeeded was because they preserve the
well-functioning To-be-Announced (TBA) market for disseminating the interest
rate risk on mortgages and allow mortgage originators to hedge out their
origination pipelines. Bordia concluded by stating, “Overall, while we favor
the credit-linked structure, given the size of credit risk transfer required
over the long run, it might be preferable to have multiple exit options
including through bond guarantors. While I believe that there are various paths
to achieve the goal of transferring credit risk to the private market, I would
caution policymakers to closely watch the pace of any such transition.”
Q&A
Johnson
asked Davis which aspects of the credit risk program were eliminated since they
were not compatible with the TBA market. Davis stated a cash senior sub structure
was explored but ultimately decided against since it would not have been TBA
compatible.
Sen.
Elizabeth Warren (D-Mass.) discussed the importance of the TBA market and
discussed reasons why credit risk products should be TBA eligible. Warren then proceeded
to ask panelists for insight into the type of regulatory oversight that would
be needed for bond insurers to ensure these insurers have enough capital to
guarantee the risks they have taken on. Panelists agreed that regulatory
oversight is needed.
Sen.
Mark Warner (D-Va.) asked for insight from the panelists concerning how much
private capital is needed for the housing finance system. Warner also expressed
caution against placing too large a regulatory burden on the housing finance
system.
For
more information on this meeting and to view a webcast, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Housing,Hearing Summaries Agency:Senate Banking Committee,Publish Year:2013
AT
DECEMBER 10TH’S SENATE BANKING COMMITTEE HEARING, lawmakers discussed the
fundamentals of transferring credit risk in a future housing finance system.
Specific attention was paid to the recent deals conducted by Fannie Mae and
Freddie Mac.
Opening
Statements
In
their opening remarks, Chairman Tim Johnson (D-S.D.) briefly overviewed prior
hearings and made mention of other panelists remarks regarding the need for a
housing finance system backed by a government guarantee and private capital.
Johnson stated the need for TBA compatibility with future credit risk
transactions. Ranking Member Mike Crapo (R-Idaho) stated “I welcome the
perspective our witnesses have on potential risk transfer options that could be
used to attract private capital to take this first loss position, including the
benefits and tradeoffs of each option. In particular, I am interested to hear
your views on which risk transfer mechanisms could bring in an appropriate
amount of private capital, while prioritizing taxpayer protection to the
fullest extent possible.”
Witness
Testimony
Kevin Palmer, Vice President at Freddie Mac,
in his prepared testimony
discussed Freddie Mac’s recent Structured Agency Credit Risk (STACR) Debt Notes
risk sharing transactions and outlined future risk sharing plan. In terms of
future transactions Palmer stated, “The first (options) is risk retention by
mortgage originators who sell mortgages to us through recourse agreements. The
key challenge to recourse transactions is that sellers retain these obligations
on their balance sheets. This has regulatory capital consequences for regulated
financial institutions. A second option we are exploring is a
senior-subordinate securitization. While doing this type of securitization
would not allow for TBA securitization on these loans under current rules, this
structure is common, particularly for jumbo and other nonconforming loans.
Laurel
Davis, Vice President at Fannie Mae, in her testimony
discussed how Fannie Mae structured and brought to market their credit risk transfer
transaction called Connecticut Avenue Securities (CAS) this year. Davis
stressed that the mortgage insurance industry is currently capital constrained.
Davis stated “Pricing might need to rise considerably in connection with
possible future transactions, unless the MI industry is able to raise new
capital.”
Ted
Durant, Vice President of Analytic Services at Mortgage Guaranty Insurance
Corporation, in his testimony
stated the need for the private mortgage insurance model to be a fundamental
component of a new housing finance system. Durant discussed possible
improvements for S. 1217 which included clarifying the distinction between
mortgage insurance and bond insurance. Durant suggested allowing for both
loan-level and pool-level mortgage insurance, and limiting bond insurance to
its traditional role of guaranteeing timely payment of principal and interest
to bondholders in the event of failure of the issuer, relying on other,
first-loss credit enhancement to ensure that the bond guarantor is in a remote
risk position.
Sandeep
Bordia, Head of Residential & Commercial Credit Strategy at Barclays
Capital, specifically discussed the STACR and CAS credit-linked deals in his testimony.
Bordia included discussion of the buyer base and market appetite for such
issuance and factors that could bring changes to those points. Bordia stated
that one reason the transactions succeeded was because they preserve the
well-functioning To-be-Announced (TBA) market for disseminating the interest
rate risk on mortgages and allow mortgage originators to hedge out their
origination pipelines. Bordia concluded by stating, “Overall, while we favor
the credit-linked structure, given the size of credit risk transfer required
over the long run, it might be preferable to have multiple exit options
including through bond guarantors. While I believe that there are various paths
to achieve the goal of transferring credit risk to the private market, I would
caution policymakers to closely watch the pace of any such transition.”
Q&A
Johnson
asked Davis which aspects of the credit risk program were eliminated since they
were not compatible with the TBA market. Davis stated a cash senior sub structure
was explored but ultimately decided against since it would not have been TBA
compatible.
Sen.
Elizabeth Warren (D-Mass.) discussed the importance of the TBA market and
discussed reasons why credit risk products should be TBA eligible. Warren then proceeded
to ask panelists for insight into the type of regulatory oversight that would
be needed for bond insurers to ensure these insurers have enough capital to
guarantee the risks they have taken on. Panelists agreed that regulatory
oversight is needed.
Sen.
Mark Warner (D-Va.) asked for insight from the panelists concerning how much
private capital is needed for the housing finance system. Warner also expressed
caution against placing too large a regulatory burden on the housing finance
system.
For
more information on this meeting and to view a webcast, please click here.