Demystifying GSE Credit Risk Transfer: Part II - How, and How Well, Does It Work?

Don Layton

Credit risk transfer (CRT) has become, in relatively quick order, a core component of the business model of the two Government-Sponsored Enterprises (GSEs), Freddie Mac and Fannie Mae, and very substantially improves that business model. In part I of this series, Don Layton listed the five key ways in which it does so, of which two have major public policy significance. In this Part II, he addresses three overlapping topics: (1) how CRT works, at a level of detail appropriate for the housing finance policy community; (2) how well CRT works – that is, how such transactions need to be designed very specifically and carefully in order to be truly effective; and (3) the need for policy-level transparency designed to reach the broader public – the mortgage industry, Congress, Treasury and many others – and not just the GSEs’ regulator, the Federal Housing Finance Agency (FHFA).