Credit risk transfer and de facto GSE reform

Finkelstein, David; Strzodka, Andreas; Vickery, James

Journal Article

Credit risk transfer and de facto GSE reform

Abstract: The Fannie Mae and Freddie Mac credit risk transfer (CRT) programs, now in their fifth year, shift a portion of credit risk on more than $1.8 trillion of mortgages to private-sector investors. This study summarizes and evaluates the CRT programs, finding that they have been successful in reducing the exposure of the government-sponsored enterprises and the federal government to mortgage credit risk without disrupting the liquidity or stability of mortgage secondary markets. The programs have also created a new financial market for pricing and trading mortgage credit risk, which has grown in size and liquidity over time. In doing so, the CRT programs provide a valuable step forward in the reform of the U.S. housing finance system.

Keywords: securitization; Fannie Mae; Freddie Mac; mortgage; GSE; credit risk transfer;

JEL Classification: G21; G28; G10; G18; G23;