Housing Policy

CRT: Effective, Popular but Threatened

Written by Kirk Willison

When the Federal Housing Finance Agency (FHFA) recently sought comments on its newly proposed capital standards for mortgage giants Fannie Mae and Freddie Mac, no topic drew more interest than the regulatory treatment of Credit Risk Transfer (CRT). This issue of Capital Commentary discusses the reasons CRT is so popular among policymakers, capital markets investors, industry groups and consumer advocates.


1. CRT: “Biggest GSE Reform in Last Decade”

More than one-third of the 120 comment letters sent to FHFA in response to the proposed rule spoke favorably of CRT and urged the agency to reconsider proposals limiting its use.

And for good reason: Since 2013, Fannie Mae and Freddie Mac (the GSEs) have transferred more than two-thirds of the credit risk on their balance sheets to private investors, reversing their former, failed model of buying and holding all the credit risk. Former Freddie Mac CEO Don Layton writes that CRT may be “the single biggest reform of the GSE system in the last decade.” He talked about his support for CRT in a recent interview for the Arch MI PolicyCast.

Arch MI is an active participant in CRT transactions at Fannie Mae and Freddie Mac and within its own portfolio through Mortgage-Insurance Linked Notes (MILN) transactions with Bellemeade RE, a special purpose reinsurer.

Why does CRT matter? Moving credit risk into private hands:

  • Materially reduces the risk of taxpayer losses by putting private capital between the GSEs and the U.S. Treasury.
  • Provides “real-time information” to the GSEs about how much risk investors think the GSEs are adding to their books.
  • Lowers the cost of raising capital by other means, enabling Fannie and Freddie to pass along savings to borrowers to keep mortgages affordable.

But incentives for the GSEs to transfer credit risk are reduced significantly by the FHFA proposal.

  • First, it slashes by roughly half the credit the GSEs receive for moving credit risk to the private sector under risk-based capital calculations.
  • Second, by establishing such a high leverage ratio (a calculation of total capital based solely on total assets without regard to risk), the GSEs would have no economic reason to transfer credit risk to investors.

2. “Make Minor, but Important” Changes, Arch MI’s Gansberg Tells FHFA 

The focus on CRT was so intense, FHFA created a listening session just days after the comment deadline specifically to hear why and how the proposal might be changed to encourage its use.

David Gansberg, CEO of Arch’s Global Mortgage Group

David Gansberg, CEO of Arch’s Global Mortgage Group, was the first speaker at the virtual listening session, noting the “almost universally” recognized success of the GSEs’ CRT programs. He contended that CRT should continue to be a “critical ingredient … ensuring the ongoing stability” of the nation’s housing finance system. Hear David’s presentation to FHFA.

He called on the housing regulator to make “a few minor, but important, adjustments” to the regulation that would preserve the GSEs’ incentives to transfer risk to private investors.

  • Elimination of the 10% risk-weighting floor on the senior-most tranche of risk retained by the GSEs is the most important step FHFA could take, argued Gansberg. Also known as the AH Tranche, this is the least-risky portion of risk retained by the GSEs. This capital would be tapped only in the rare cases where losses exceed the risk already transferred to private markets.
  • Additional capital buffers required under the proposal are more than adequate to account for any risk retained by the GSEs, according to Arch, and the risk-weighting floor is both redundant and costly to the GSEs.
  • Gansberg also called for a reduction in the 4% Leverage Ratio.

3. Support for CRT is Widespread

Edward DeMarco, President of the Housing Policy Council, concurs with Gansberg that the GSEs should be encouraged to transfer risk off their books and that the leverage ratio should be reduced.

DeMarco’s support for CRT isn’t surprising: He oversaw the FHFA as its Acting Director and was the first to instruct Fannie Mae and Freddie Mac to transfer credit risk to private investors. He knows better than most the important role that CRT plays in reducing taxpayer risk.

But he worries that a too-high minimum leverage ratio will not only discourage CRT but also encourage the GSEs to take on too much risk to meet the expectations of shareholders of their common stock. Cutting the proposed leverage ratio from 4% to 3% would go a long way toward ensuring continued use of CRT, he argues.

Mortgage Bankers Association President and CEO Bob Broeksmit criticized efforts to make CRT less attractive. In fact, the association called for CRT to be “retained, improved and expanded.”  MBA isn’t alone.

The National Association of Home Builders worries that the incentive for Fannie Mae and Freddie Mac to engage in CRTs would be severely diminished by the proposed rule and credit risk held by the GSEs would significantly increase.

Americans for Tax Reform, a right-of-center think tank, cited CRT’s ability to shift “the Enterprises’ credit risk from a first-loss to a last-loss position” and noted its ability to serve as an “important price-discovery mechanism.”

A collection of progressive advocacy groups, including the Center for Responsible Lending, the Consumer Federation of America and the National Community Reinvestment Coalition, expresses concern that a reduction in credit for CRT at the GSEs would have a spillover effect with MI companies, like Arch MI.

“With less incentive to do CRT, the GSEs would hold more risk than they do today. Assuming the rule’s disincentives to CRT are later applied to mortgage insurers through PMIERs, mortgage insurance companies … would also concentrate more risk rather than distributing it as well,” progressive advocacy groups wrote.

Even Republicans on the House Financial Services Committee advised FHFA to reconsider its barriers to CRT use. Twenty-two GOP committee members representing 16 states co-signed a letter written by Rep. Blaine Luetkemeyer of Missouri requesting that FHFA Director Mark Calabria “ensure a robust, risk-based CRT marketplace in the re-proposed final regulatory capital framework of the [GSEs].”

4. But Bank Regulator Sees Silver Lining in CRT 

While FHFA considers reducing incentives for using CRT, the regulator of national banks will study whether banks should use it more often. At the conclusion of a recent meeting of bank regulators under the auspices of the Financial Stability Oversight Council (FSOC), Acting Comptroller Brian Brooks suggested CRT deserves a look as a way of improving bank risk management.

“We look to avoid market distortions and different approaches to regulation of similar risks across the system and seek thereby to ensure that banks can continue playing a meaningful role in the provision of housing finance. I note that competition is itself an excellent form of risk management. One area in particular that we are looking at closely is the provision of capital relief for credit risk transfer transactions, an area also addressed in the FHFA’s re-proposal,” said Brooks.


Most of us know Habitat for Humanity for its extensive work in building affordable houses. But the nonprofit is widening its reach into advocacy as it takes a broader approach to supporting lower-income families and neighborhoods. Watch our latest episode of the Arch MI PolicyCast with Habitat CEO Jonathan Reckford as he describes the nonprofit builder’s multi-year policy campaign, “The Cost of Home.”

About the author

Kirk Willison

Kirk Willison is Arch MI’s chief advocate on Capitol Hill and before regulatory agencies. He also fosters relationships with trade groups, community organizations and think tanks to enhance Arch MI’s profile, influence and reputation as a thought leader in housing finance.