The debt securities that Fannie and Freddie issue to share mortgage risk with private investors have been a big hit with investors. The two primary programs, Connecticut Avenue Securities (Fannie) and Structured Agency Credit Risk (Freddie), function like catastrophe bonds. The principal is available to the issuer in the event that losses on a reference pool of single-family mortgages reach a predetermined level.

This kind of reinsurance is one of the few means available to either GSE to raise capital while they are in conservatorship. Yet many contend that CAS and STACR are not the right kind of capital. There are two primary arguments. The first is that it could prove tough to raise this capital at precisely the point in the housing market cycle when it’s most needed. Investors would be too skittish. The GSEs certainly got a taste of this during a bout of broader capital market volatility early in 2016. They both shifted their emphasis, temporarily, to other kinds of risk sharing where the counterparties are insurers, not capital markets investors.

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