U.S. government eyes risk-sharing in housing bonds
Fannie Mae and Freddie Mac buy mortgages from lenders to free up cash for banks to make more loans. The two companies then repackage the loans for sale to investors as securities and charge fees to guarantee the debt.Under the private-sector risk-sharing idea, they would begin to issue some bonds without a federal guarantee.Investors in those securities would receive a higher return to compensate them for the greater risk of losses, according to the people familiar with the matter. The Wall Street Journal first reported on the possibility on Friday.The idea is just in the concept stage. The administration could consider a variety of ways to get investors to take on more credit risk, one source said.The administration and housing regulators are eyeing the possibility of using derivatives or relying on greater mortgage insurance coverage for the loans underlying the bonds to spur private-sector interest, according to the sources.Any final plan on investor risk sharing would require the approval of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac.The Obama administration would like to begin testing ideas to bring in greater private-sector involvement as early as next year, the sources said.The approach under consideration would reduce the long-term risk exposure of Fannie and Freddie. Together with the Federal Housing Administration, the companies now fund roughly 90 percent of all new U.S. mortgages.FHFA’s acting director, Edward DeMarco, said in a speech last month that his agency is considering various alternatives to attract private investors to the market through different types of risk-sharing structures.