Credit Risk Transfer Agreement
The comprehensive analysis and internal reporting of CRT activities support the security and solidity of the company. Business crT programs could pose a significant financial risk if the associated risks are not well understood and managed. Rigorous risk analysis, combined with effective reporting to senior management and, where appropriate, the Board of Directors, could identify potential risks and further support oversight of the RTA program. This advisory bulletin sets out the prudential expectations of the Federal Housing Finance Agency (FHFA) with respect to the analysis and internal reporting of certain planned or current credit risk transfer (RTA) activities. This advisory bulletin applies to Fannie Mae and Freddie Mac (Business) and is effective immediately. Some CRT transactions result in a risk of counterparty default. Although crT transactions serve to reduce the credit risk of individual borrowers, the reduction may be partially offset by additional credit risks on the part of corporate counterparties. Counterparty credit risk is introduced into insurance-related crT transactions because the risk that an insurance undertaking will not comply with its potential obligation replaces the risk that individual borrowers will not comply with their obligation relating to the underlying mortgage. Price risk refers to the risk that it will not be possible for a company to make new CRT transactions due to market costs. A company`s ability to transfer credit risk on a continuous and regular basis depends on the demand from third-party investors or counterparties to carry out new transactions, but this demand can weaken or disappear significantly in times of adverse economic conditions or poor market conditions. The interest of market participants can fluctuate from one real estate price cycle to another and influence the demand for new and existing CRT instruments. The countercyclical nature of some CRT transactions could expose companies to price risk, as they may incur much higher costs by conducting crT transactions during periods of significant economic downturn or severely adverse market disruptions. Financial risk is the uncertain impact of net income and balance sheet due to costs and credit default protection provided by investors or insurers.
The cost of acquiring credit protection by companies through CRT operations can be significant compared to the income from guarantee fees. The expected reduction in credit risk by investors and insurers is not exactly known at the time of lending and requires complex calculations to be estimated. The financial risk could be significant and have a negative impact on the profitability and capital level of the company. The use of CRT transactions changes the income and credit risk profiles of businesses by transferring a portion of estimated credit losses. Modeling applications estimate these credit losses. Credit losses carried forward to investors or insurers during the life of the CRT transaction may differ materially from the companies` initial estimates of expected credit losses assumed by investors or insurers. Residual credit risk refers to the credit risk that remains in the reference pool for loan companies. As a rule, only part of the credit risk is transferred when the CRT transaction takes place. In addition, the termination dates of certain crT transactions may be earlier than the contractual maturity of the underlying single-family or multi-family mortgages in the reference pool. If credit loss events occur in the case of single-family or multi-family loans in the reference pool after the maturity of the CRT issue or insurance business, the companies remain exposed to residual credit risk for the duration of the loans remaining in the initial reference pool.
The results of the price risk analysis should be incorporated into the reports of the Board of Directors. Corporate crT activities include debt instruments with different structures and characteristics, as well as insurance or reinsurance activities and senior/subordinate securitisations. CrT programs are integrated into the core operations of single-family and multi-family homes and have an impact on the overall credit risk profile of businesses. To perform the consolidated analysis, the stochastic analysis described above must be estimated and aggregated to estimate the net result and credit losses absorbed by investors or insurers (ex post, transaction level). The price risk analysis is expected to measure the strength and health of the cathode ray tube market in order to assess the economic sensitivity of the closing of new cathode ray tube transactions. The cost of transferring credit risk can vary depending on the position of the economy in the business cycle. It can be more costly for businesses to transfer credit risk during periods of economic instability or uncertainty. Company management should develop measures to analyze the price risk of cathode ray tubes. Transaction-level analysis should thoroughly assess the financial value of individual CRT transactions, i.e. the expected revenues and expected costs resulting from CRT transactions. .