The Federal Housing Finance Agency (FHFA) should consider the impact credit risk transfer structures might have on borrowers. In bringing in private capital, FHFA should be careful to ensure that FHFA does not exchange access to credit or borrower protections for the capital the private market offers. We are concerned that the credit risk transfer programs have the potential to:
- Increase prices for certain borrowers which would effectively limit access to credit for some creditworthy borrowers. Recent pricing changes by mortgage insurance (MI) companies illustrate this risk. These risks are most acute for, but not entirely limited to, front-end credit risk transfer structures.
- Reduce incentives for strong quality control. As the Enterprises cede credit risk they must continue to ensure quality origination and servicing. Borrowers should receive quality loans as well as loan modification and foreclosure prevention opportunities in the same way they would have had the Enterprises retained credit risk.
- Favor larger lenders over smaller lenders which would also effectively limit access to credit for borrowers by limiting the set of lenders who provide loans. Some front-end structures, by virtue of their complexity, are effectively only open to larger lenders. If these structures create market pricing advantages, small lenders will be disadvantaged in the mortgage market.