Could government-sponsored enterprises, tasked with making residential mortgages accessible to underserved populations and increasing the liquidity of mortgage investments, use credit risk transfers as a tool to achieve these goals?
A recent research brief from the Housing Finance Policy Center explores this idea:
CRTs can help the GSEs satisfy these objectives in a manner that avoids the inherent tension
between risk and innovation while opening new avenues for investors to participate in the mortgage
and housing markets. For example, the GSEs could partner with social impact investors to structure
CRTs on mortgage products that satisfy investors’ impact criteria, in turn broadening the pool of CRT
investors and drawing more capital into the market. CRTs could also be used to gauge market demand
for new products through reverse inquiries from investors and allow for healthy competition among
pilot sponsors for new products and executions.
Consider manufactured housing, the nation’s largest source of unsubsidized affordable housing and
13 percent of occupied homes in rural communities and small towns. These factory-built homes comply
with the national US Department of Housing and Urban Development code, cost significantly less than
site-built homes, and primarily serve older homeowners with lower incomes and lower net worth than
site-built homeowners. Today, about 17.5 million Americans live in manufactured homes (Russell et al.
An opportunity exists here for the GSEs to use CRT tools to enter this market, create liquidity and standardization, and lower homeownership costs for some forms of manufactured housing. To understand how the GSEs can do this effectively and prudently, it is important to note that even though the secondary market for manufactured home chattel loans is small, there are investors active in that space. The GSEs could leverage the activities of existing lenders and investors through this more expansive and “proactive” view of CRT. Specifically, the GSEs could work with existing lenders to develop a standardized product for manufactured housing chattel loans, including a single set of loan terms and documents, credit parameters, and delivery mechanics, which would create significant value and bring helpful liquidity to an otherwise fragmented market.
The GSEs could leverage this standardization by developing any one of several types of CRT structures with existing and potential investors. To provide liquidity to the market, the GSEs could purchase mortgages directly, thereby ensuring standards are met and providing quality control in loan manufacturing. Additionally, they could hold some degree of backstop or catastrophic risk that would be highly unlikely to ever result in any loss. Possible CRT structures could range from front-end commitments from investors to purchase CRTs to senior subordinate securitizations