II. Equal Playing Field for All Lenders:
With respect to the Equal Playing Field for All Lenders, we strongly support the statement that the FHFA should work to ensure the Enterprises’ activities, including credit risk transfers, do not give a competitive advantage to particular lenders based on the volume of business transacted with the Enterprises. Our comments to the FHFA’s questions are as follows:
Question B1: What credit risk transfer strategies work best for small lenders? Why?
Credit risk transfer strategies that work best for small lenders have two primary features: 1) they are “volume-blind,” in that they do not require a particular number of originations in order to make economic sense for a given lender; and 2) they do not require significant risk-retention for smaller lenders who are generally less-equipped and do not have the capacity or flexibility on their balance sheet to manage that risk effectively.
Smaller credit unions may not have the expertise or scale to manage off-balance sheet assets. The scale also presents an issue for a lender as they need to be able to spread the costs of a risk retention over a pool of loans. The smaller the pool, the more costs are allocated to the pool placing smaller institutions at a significant competitive disadvantage to larger lenders if additional risk retention were required in order to participate in the securitization process. Finally, private mortgage insurance needs to be maintained as an option as it can be utilized as an effective risk transfer strategy.
With regard specifically to Collateralized Recourse Transactions, there is some question as to the feasibility of the use of special purpose vehicles or other mechanisms by credit unions to manage risk effectively across many small entities. Of particular concern is National Credit Union Administration’s (NCUA) pending rule on Asset Securitization (RIN 3133–AE29), which would only allow a credit union to securitize loans it has originated. While this rule has not been finalized, we have urged NCUA to make changes that would allow multiple credit unions to utilize a vehicle where loans from multiple credit unions could be securitized, which could be an effective way to serve members in a cost efficient manner. However, until we understand the NCUA’s ultimate approach, small credit unions could effectively be at a competitive disadvantage to other financial institutions due to their inability to generate sufficient volume to participate in a securitization process. We urge the FHFA to consider this situation in developing their proposal further.
III. Guarantee Fee Impacts and Tradeoffs:
Finally, with respect to the Guarantee Fee and its Impacts and Tradeoffs, we offer the following comments:
Question C1: How should FHFA and the Enterprises incorporate information learned through the pricing of credit risk transfer transactions into the practice of setting both the level of and frequency of changes in the Enterprises’ guarantee fees?
We recognize the need for guarantee fees to reflect as accurately as possible the aggregate risk to which the Enterprises are exposed. This need must be balanced, however, with the role the