FHFA Director Watt today made clear what the pricing of GSE risk share transactions had been indicating for some time: the GSEs are finding it too expensive to sell the first 50 bps of credit losses on their risk transfer deals.  As a result, CRTs going forward will have the GSEs retain this critical 50 bps of expected loss, leading us to question how much risk is shared and how much could be done without the GSEs in a truly viable, deep credit-risk transfer (CRT) market that didn’t depend on implicit or explicit guarantees.  In the near term, the FHFA decision will make it easier for the GSEs to expand as now planned into new loans and to seek more investors.  However, the fact that private capital won’t take even 50 bps up front speaks to the improbable nature of any GSE-reform plan which, like Johnson-Crapo, depends on only a cat-risk government backstop.

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