Staff Reports
Credit Risk Transfer and De Facto GSE Reform
Number 838
February 2018

JEL classification: G10, G18, G21, G23, G28

Authors: David Finkelstein, Andreas Strzodka, and James Vickery

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.

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AUTHOR DISCLOSURE STATEMENT(S)
David Finkelstein
David L. Finkelstein is a named executive officer of Annaly Capital Management, Inc. (“Annaly”), where he serves as Chief Investment Officer. Annaly is a leading diversified capital manager that invests in and finances residential and commercial assets, including Agency mortgage-backed securities and residential credit securities and mortgages. Annaly’s investments include Agency credit risk transfer assets (“CRT”), which are the subject of this paper. As of December 31, 2017, Annaly’s investment in CRT represented approximately 0.5 percent of Annaly’s investment portfolio based on assets. Mr. Finkelstein owned 300,000 shares of Annaly’s common stock as of February 12, 2018, which is publicly disclosed in filings available through Annaly’s website and the U.S. Securities Exchange Commission. As of January 31, 2018, Mr. Finkelstein’s investment in Annaly’s common stock represented approximately 0.03 percent of Annaly’s outstanding shares of common stock.

Andreas Strzodka
Andreas Strzodka serves as a desk strategist Annaly Capital Management, Inc. ("Annaly"). Annaly is a leading diversified capital manager that invests in and finances residential and commercial assets, including Agency mortgage-backed securities and residential credit securities and mortgages. Annaly's investments include Agency credit risk transfer assets ("CRT"), which are the subject of this paper. As of December 31, 2017, Annaly's investment in CRT represented approximately 0.5 percent of Annaly's investment portfolio based on assets. Mr. Strzodka owns less than 0.001 percent of Annaly's outstanding shares of common stock as of February 12, 2018.

James Vickery
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.