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United States Senate WASHINGTON, DC 20510 June 10, 2015 ‘The Honorable Melvin L. Watt Director, Federal Housing Finance Agency Constitution Center 400 7" Street, SW Washington, DC 20024 Dear Director Watt: We are writing regarding the credit risk transfers currently being carried out by Fannie Mae and Freddie Mac (“the Enterprises”). We supported the direction of the risk sharing language within Title VII of The Financial Regulatory Improvement Act of 2015, and we strongly support the expansion of these transactions, given they provide a vehicle for moving the ‘government out of the first loss position and inform the process for policymakers looking to invite greater private capital into the market. The credit risk transfers are a vehicle for moving the housing market forward by attracting private sector investors, improving access to credit, and reducing taxpayer risk. As such, we ask that you prioritize work with the Enterprises on transactions designed specifically to push out first loss credit risk to the market, and to encourage transparency for investors and the public so that we can all better judge how these transactions impact returns to the Enterprises, costs to the taxpayer, and effects to the health of the broader housing finance system, ‘The Federal Housing Finance Agency's (“FHFA”) public reports leave open questions about the extent of guidance and oversight the FHFA is currently providing the Enterprises on the credit risk transfers. FHFA’s current Strategic Plan includes oversight of the “Enterprises” activities to increase and deepen credit risk sharing transactions, setting targets for multiple types of single family mortgage credit risk-sharing transactions and holding Enterprise management accountable for meeting those targets. FHFA will require that the Enterprises assess the ‘economics and feasibility of additional types of risk transfer structures.”' FHFA’s Scorecard sets goals that incentivize employees of the Enterprises. For single family homes, the 2015 Scorecard directed the Enterprises to increase the amount of unpaid principal balance (“UPB”) that must be put into reference pools. FHPA directs the Enterprises to “utilize at least two types of risk transfer structures.”? Given the two years of growth seen so far in the credit risk sharing transfers, we believe that a concrete plan for progress in these transactions forward is necessary, as is the transparency that accompanies such a plan. In our estimation, the requirements in the Strategic Plan and 2015 Scorecard listed above lack specificity, metries, and long-term direction. Therefore, we ask that FHFA release a five-year timeline including metrics and annual goals regarding the credit risk * hup// AboutUs/Reports/ReportDocuments/FHFA Strategic Plan Fiscal Years 2015-2019.pdf /www.fhfa,gov/ Aboutls/Reports/ReportDocuments/2015-Scorecard pdf ‘tansfer program. This timeline should include the projected percentage of Enterprise UPB covered under the credit risk transfer program in each year; the projected percentage of antnual new business subject to first loss and front-end risk sharing, including the projected depth of first 4oss risk sharing per type of transaction; and a granular assessment of the completed credit risk transfers that details metrics which measure the relative success or failure of each pilot. Additionally, we request that FHFA accomplish the steps below and provide responses to the ‘questions therein: 1. Credit Risk Transfer Goals: Provide a description of the new credit risk sharing pilot programs that FHEA intends to roll out over the next five years and steps the FHFA intends to take to solicit new ideas for new and innovative ways to lay off first loss and front-end credit risk, transferring credit risk away from the Enterprises and the taxpayers. Please include a description of steps FHFA intends to take to ensure its credit risk transfer goals can be met throughout the credit cycle. 2. Mortgage Insurance Transactions: Provide a description of how FHEA intends to move forward with mortgage insurance-focused transactions following the recently finalized mortgage insurance master policy requirements and Private Mortgage Insurer Eligibility Requirements (PMIERs). a. Should FHFA pursue additional mortgage insurance-focused credit risk deals, does the FHFA expect to adjust guarantee fees and Loan Level Pricing Adjustments (LLPAs) to reflect the actual level of risk being taken by the Enterprises? b. In any additional mortgage insurance-focused credit risk deals, does the FHFA expect to include additional requirements on mortgage insurers in order to better enable guarantee fee and LLPA adjustments? 3. Transparency: Describe the amount of eredit risk that has been transferred from the Enterprises on an annual basis. Explain how FIFA intends to better incorporate actual loss-based risk transfers rather than relying on fixed loss calculations. a. Do you believe that providing additional information about the deal structures, including the amount of first loss risk transferred, credit characteristies of the pools, relevant pricing information down to loan level, and the cost of deeper loan level insurance coverage or front-end risk sharing, is important fo disclose to investors and the public? b. Could this information help attract additional investors or lead to more efficient risk transfers? Do you believe it is in the taxpayers’ interest for the Enterprises to continue to expand the disclosures it shares with investors and the public? 4, Expanding the Investor Base: Provide a description of steps FHFA intends to take 10 broaden the eligible investor base for credit risk transfer programs a, How would compliance with Regulation AB affect the credit risk transfers? b. Would greater diversity in reference pools contribute to attracting new investors? Could additional diversity in the reference pools contribute to improved access to credit over time? Do you agree that as the credit risk transfers move forward, the reference pools of loans should more closely represent the entire housing market? c. Does the FHFA expect the Enterprises to develop credit risk transfers that are non-TBA eligible in the future? If so, does FHFA expect this to impact the private label securities (“PLS”) market? In FHFA’s view, how will the TBA market need to adapt to the evolving practices in the credit risk transfers and the single security? Are the Enterprises and FHFA engaging regularly with SIFMA. on the rules of the TBA market? 4. What potential benefits and drawbacks would FHFA expect from greater involvement of REITs in the credit risk transfers? 5. Provide a list of any suggested legislative text that you believe would help facilitate any of these objectives above. Above all, we support a housing finance system that requires private sector participants to absorb a significant amount of risk up front, putting taxpayers in a much more remote position of risk. We share the opinion that the Enterprises should maximize the types of credit risk transfer structures that are tested, taking advantage of the ability to test market demand and determine appropriate pricing, with the greater goal of increasing the amount of first-loss risk transferred to a diverse range of private sector participants. ‘Thank you for your consideration and your timely response. Sincerely, Mik Nae ; } ecb edkege Ch Wh d6e-