SCI Magazine Summer 2018

Mortgage Finance
“
THE GSES COULD BE MADE TO
RESEMBLE MORE OF AN INCOME-
ORIENTATED STOCK THAN A
GROWTH STOCK
”
conservatorship in 2008. Cooperstein notes
that the pre-crisis GSEs’ “fatal f law” was that
they were private companies with a public
mission and that reconciling those two facts
was impossible.
“They eventually chased bad loans
because executives knew if they did not maximise
returns they would be replaced. Despite
there being only two GSEs, competition was
ruinous and led to the GSEs charging a third
of what they should have for the risk they were
taking,” he says.
This is something which the GSEs themselves
realised and have worked to remedy.
Fannie Mae and Freddie Mac have both established
CRT programmes and it is the success
of these schemes that has seen calls for them
to be retained in most reform scenarios.
“Coming out of the financial crisis we realised
that we needed a new way to do business.
We could not just be a buy-and-hold investor,
instead we needed to create new ways to
distribute credit risk and that required developing
a broad and liquid market,” says Laurel
Davis, vp, capital markets, Fannie Mae.
She continues: “That is why our CRT
activity has grown from our first CAS deal in
October 2013 to having now transferred credit
risk on over US$1trn of mortgages. It has been
a case of incredible evolution and growth and
now it is the most liquid US RMBS market
there is.”
Davis notes that Fannie Mae’s size necessitated
a deep and scalable market, which
the GSE has built through consistency in the
timing and structure of issuances. It publishes
Laurel Davis, Fannie Mae
deal calendars and issues in benchmark size,
which has developed the investor base from
the hedge funds who were early buyers to
now also include many of the large investment
managers, who now see these deals as a
staple investment.
“We have formed close partnerships with
dealers, particularly rewarding new issue
mandates to those dealers that we see do the
most to support secondary trading. That
helps incentivise the dealers to trade the
product. Last year we issued US$8.5bn and
because of slightly lower origination volume
we expect to issue US$7.6bn this year,”
says Davis.
The GSEs appreciate the need to continue
to innovate, as well. While Fannie Mae is
Exhibit 2: Projected consolidated leverage ratio
$ billions at 31st December 2017
6.0
5.0
4.0
4.3%
1.7%
5.1%
1.9%
5.0%
Target
Ratio
Target Ratio %
3.0
2.0
1.6%
3.1%
1.6%
2.6%
3.3%
3.0%
Target
Ratio
1.0
1.0%
1.0%
1.3%
1.5%
0
0.3%
2016A 2017P 2018P 2019P 2020P
Core Capital 1 ($188)
$12 $75 $131 $167
CRT Capital 2 54
67 78 88 97
1
Core Capital includes Common Equity and Junior Preferred Stock
2
CRT Capital includes CRT debt issued and outstanding to third parties
Source: The Moelis & Company Blueprint for Restoring Safety and Soundness to the GSEs
www.structuredcreditinvestor.com
SCI Magazine | Summer 2018
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