Credit Risk Transfer (CRT) was an important financial innovation developed by the Federal Housing Finance Agency (FHFA) and the government-sponsored enterprises (GSEs) after the 2008 housing crisis. As policymakers consider reforming the GSEs and a potential release from conservatorship, preserving and expanding CRT is critical. CRT enables GSEs to raise capital efficiently and cost-effectively, manage economic risks, and improve return on capital, making it a vital component of the housing finance system. This paper explains the CRT process and how it supports GSEs, and traces the evolution of the regulatory framework shaping its use.

Highlights include:

• CRT fundamentals: Overview of CRT in the U.S. market and its benefits.
• 2013-2017: How the FHFA required Freddie Mac and Fannie Mae to transfer most of their credit risk to the private sector.
• 2018-2020: Impacts of the FHFA introducing the Conservatorship Capital Framework (CCF) in 2017, such spreads and coverage.
• 2020-2022: The shift in CRT placements after FHFA scorecard changes, COVID-19, and the introduction of the enterprise risk capital framework (ERCF).
• 2023-2025: CRT under the ERCF and the impact of the countercyclical capital adjustment.
• Potential release of GSEs from conservatorship: With the FHFA and Treasury taking steps to prepare for a potential release of the GSEs, how CRT can be used as a flexible and efficient source of capital.
• Recap and release: How GSEs can use CRT to facilitate the recapitalization and release, simultaneously increasing return on equity and mitigating the risk of the GSEs' monoline business structure.

This report was commissioned by Liberty Mutual's Mortgage Insurance and Reinsurance Group.