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GSE Risk-Sharing Deals Would Be Boosted Under New Bipartisan Bill

A bipartisan duo of House lawmakers introduced a bill Thursday that would push Fannie Mae and Freddie Mac to engage in more credit risk-sharing transactions.

The bill, by Reps. Ed Royce, R-Calif., and Gwen Moore, D-Wis., would require the director of the Federal Housing Finance Agency, which controls the companies in conservatorship, to "engage in significant and increasing credit risk-transfer transactions."

Fannie and Freddie started engaging in risk-sharing deals in 2013 in an effort to limit taxpayer losses and transition to a new housing finance system that will presumably eventually be approved by Congress.

But lawmakers want investors to take on more of the initial losses on the securities they sell and for the government-sponsored enterprises to increase and diversify the types of risk-transfer transactions they develop.

"Congress should encourage Fannie and Freddie to increase the amount and the types of credit risk transfer transactions to the maximum level that is economically and commercially viable. Doing so is not only compatible with housing finance reform, it eases the way for future action," said Royce in a press release.

The risk-sharing deals are also thought to be a positive for price discovery and to gauge investor appetite. Investors have largely stayed away from mortgage-backed securities since the crisis unless they are guaranteed by the GSEs.

The bill would require the FHFA director, a position currently held by former North Carolina Congressman Mel Watt, to start developing a plan to increase the volume of risk-sharing deals within a year of the bill's passage and to increase the types and amount each year. The legislation also calls for the deals to try and convince investors to take on 4% of the credit risk starting from the first-dollar loss.

The bill would also require the FHFA to develop a pilot program for lenders with less than $10 billion in assets so smaller investors can also participate in the risk-sharing deals and it amends commodities rules so Fannie and Freddie could create credit-linked notes to transfer risk.

"I think this bipartisan legislation builds on the good work the FHFA has done in housing finance. Together, I am confident we will collectively pave the way for a stronger, more stable housing market for all Americans," said Moore.

This article originally appeared in American Banker.
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