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Credit risk transfer and de facto GSE reform

Author

Listed:
  • Andreas Strzodka
  • James Vickery
  • David Finkelstein

Abstract

We summarize and evaluate Fannie Mae and Freddie Mac?s credit risk transfer (CRT) programs, which have been used since 2013 to shift a portion of credit risk on more than $1.8 trillion of mortgages to private sector investors. We argue that the CRT programs have been successful in reducing the exposure of the federal government to mortgage credit risk without disrupting the liquidity or stability of mortgage secondary markets. In the process, the programs have created a new financial market for pricing and trading mortgage credit risk, which has grown in size and liquidity over time. The CRT programs provide an important building block to help facilitate reform of the U.S. housing finance system.

Suggested Citation

  • Andreas Strzodka & James Vickery & David Finkelstein, 2018. "Credit risk transfer and de facto GSE reform," Staff Reports 838, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:838
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    References listed on IDEAS

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    1. W. Scott Frame & Andreas Fuster & Joseph Tracy & James Vickery, 2015. "The Rescue of Fannie Mae and Freddie Mac," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 25-52, Spring.
    2. Deborah Lucas, 2010. "Measuring and Managing Federal Financial Risk," NBER Books, National Bureau of Economic Research, Inc, number luca07-1, October.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 215-268, November.
    4. Erik Hurst & Benjamin J. Keys & Amit Seru & Joseph Vavra, 2016. "Regional Redistribution through the US Mortgage Market," American Economic Review, American Economic Association, vol. 106(10), pages 2982-3028, October.
    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    6. Lucas, Deborah (ed.), 2010. "Measuring and Managing Federal Financial Risk," National Bureau of Economic Research Books, University of Chicago Press, number 9780226496580, March.
    7. Joshua Wright & James Vickery, 2013. "TBA trading and liquidity in the agency MBS market," Economic Policy Review, Federal Reserve Bank of New York, issue may, pages 1-18.
    8. Deborah Lucas, 2010. "Introduction to "Measuring and Managing Federal Financial Risk"," NBER Chapters, in: Measuring and Managing Federal Financial Risk, pages 1-12, National Bureau of Economic Research, Inc.
    9. Froot, Kenneth A., 2001. "The market for catastrophe risk: a clinical examination," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 529-571, May.
    10. W. Scott Frame, 2003. "Federal Home Loan Bank mortgage purchases: Implications for mortgage markets," Economic Review, Federal Reserve Bank of Atlanta, issue q3, pages 17-31.
    11. Deborah Lucas & Robert McDonald, 2010. "Valuing Government Guarantees: Fannie and Freddie Revisited," NBER Chapters, in: Measuring and Managing Federal Financial Risk, pages 131-154, National Bureau of Economic Research, Inc.
    12. Dwight Jaffee, 2003. "The Interest Rate Risk of Fannie Mae and Freddie Mac," Journal of Financial Services Research, Springer;Western Finance Association, vol. 24(1), pages 5-29, August.
    13. repec:fip:fednep:00057 is not listed on IDEAS
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    1. repec:fip:fednep:00055 is not listed on IDEAS
    2. repec:fip:fednep:00051 is not listed on IDEAS
    3. Jesper Berg & James Vickery & Morten Bækmand Nielsen, 2018. "Peas in a pod? Comparing the U.S. and Danish mortgage finance systems," Economic Policy Review, Federal Reserve Bank of New York, pages 63-87.
    4. repec:fip:fednep:00052 is not listed on IDEAS

    More about this item

    Keywords

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

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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