A $50 Billion Housing Bond Market Is Stuck in Regulatory Limbo

Questions are arising about the long-term viability for agency-backed credit-risk-transfer securities.

(Bloomberg) — A $50 billion bond market once heralded as the future of housing finance has been stuck in limbo since the start of the coronavirus crisis, and now proposed regulatory changes have left investors worrying that they might be left holding the bag.

At issue are so-called credit-risk-transfer securities offered by Fannie Mae and Freddie Mac. They are tied to Fannie and Freddie’s mortgage-backed securities and pay investors principal and interest as long as the borrowers don’t default.

Fannie hasn’t issued the bonds since the pandemic began, and the company’s executives are privately telling some investors that it has doubts about the market’s longterm viability. Freddie, meanwhile, has resumed issuing the bonds after a pause near the start of the pandemic. The lack of activity is starting to worry investors that they will be saddled with securities that are akin to museum pieces that no one is interested in buying.

The uncertainty stems from a proposal by Federal Housing Finance Agency Director Mark Calabria that many say would make it uneconomic in some cases for Fannie and Freddie to keep issuing the securities. Calabria’s plan would reduce the capital relief the companies get by issuing CRT by about half in some circumstances, according to Chris Helwig, a managing director at Amherst Pierpont Securities.

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