Plenty of Risk to Go Around

Andrew Rippert speaks to the advantages of the GSEs’ Credit Risk Transfer program, and looks at the changes in leadership on multiple fronts.

Among the more significant developments in the mortgage industry has been the Federal Housing Finance Agency’s development in 2012 and thereafter of a credit risk transfer program for the Government-Sponsored Enterprises under its conservatorship, Fannie Mae and Freddie Mac. The idea: Transfer significant risk exposure to private investors, reducing the risk carried directly by the GSEs — and hence reducing the risk posed to taxpayers while they’re in conservatorship.

It’s a strong and solid move, notes Andrew Rippert, chief executive officer of the Global Mortgage Group at Arch Capital Group Ltd., involved in insurance, reinsurance and mortgage insurance around the globe.

“Prior to the significant correction in the mortgage market, you had the vast majority of the residential mortgage credit risk in the agency, the Fannie/Freddie space, sitting on the balance sheets of Fannie Mae and Freddie Mac, and a group of mortgage insurers” — seven at the time, Rippert said. Fannie and Freddie — as well as those insurers — had a risk-management philosophy of “aggregating risk, holding it on their balance sheet, with the belief that they had a sufficient volume of capital to withstand any downturn in the market.”

They hoped for the best, and didn’t get it. So Fannie and Freddie ended up in conservatorship, and not all of those mortgage insurers survived.

Now, expanding the pool of investors assuming risk has helped shield the GSEs, and taxpayers, from risk and volatility — and that increased pool has brought more perspectives, and challenged assumptions about risk, Rippert noted. It’s resulting in a “meaningful dialogue” beneficial to all parties, he said.

Rippert is among 13 top thinkers, thought leaders and business leaders across the field of mortgage finance who shared with Mortgage Media senior advisor Dave Stevens their thoughts as to what 2019 will hold. Rippert’s conversation with Stevens focused on the role of the Credit Risk Transfer and Rippert’s take on the changes in leadership at not just the FHFA but at both GSEs, as well as the changes on Capitol Hill.



Among the fallout from the global financial crisis was the advent of various mechanisms to transfer credit risk to the private market — investors ranging from insurance companies to asset managers to hedge funds. Notable among those mechanisms: the Credit Risk Transfer (CRT).

In 2012 and 2013, the GSEs, under FHFA’s direction, took a meaningful portion of the risk they had been shouldering themselves and began to “push it out to other investors,” in the capital debt, reinsurance and insurance markets, Rippert noted. “And what that essentially did, is it took that catastrophic risk, that volatility that surrounds the mortgage credit risk that the GSEs are holding on their balance sheet, and it reduced in a very meaningful way, the uncertainty of the outcome around that.” Put simply, the GSEs aren’t stuck backing the obligations with solely their own capital base anymore.

Rippert noted that his own company sold $1.5 billion worth of credit bank notes in 2018, “moving some of the uncertainty out to those other sources of capital.”

It was a matter of learning from past mistakes, as when the financial crisis left the GSEs holding the bag for the obligations they’d incurred.

“They really originated with their own view of risk, and kept it on their own balance sheets, and hoped for the best in an economic downturn,” Rippert said. “And we saw what happens. In 2008, Fannie and Freddie got taken into conservatorship. We mortgage insurance companies went through the crisis and were paying the claims; there were a number of them that went out of business. And so this concept of aggregating mortgagee credit risk on a single balance sheet and thinking that you can manage the catastrophic … was proven false, if you will.”

It’s something of a win-win: Selling the CRT notes not only reduces your own share of the risk, but it gives you access to perspectives from a broader swath of the financial community — and it gives investors a steady means of access to the residential mortgage credit market.

“What we’re dealing with is a fairly sophisticated group of investors, who ask a lot of very probing, very meaningful, very significant questions, and they can cut through any story you’re trying to spin to sell them some risk, and is so doing, they question your own assumptions about that risk,” Rippert said — a challenge that’s helpful to firms like his and to the GSEs, he noted. “And there’s meaningful dialogue that takes place, and a meaningful transfer of information, and perceptions on the level of risk in the market, which we think broadens the conversation, and forces us to be more thoughtful about the risk we’re taking on.”

Theoretically, Stevens noted in an aside, the GSEs could distribute ALL the risk to private parties, acting as an intermediary taking in mortgages and distributing them through firms like Arch — eliminating the risk to the taxpayer altogether.



A lot of new faces are in leadership roles. Pending confirmation, Mark Calabria will take over as FHFA director. Both GSEs will see new CEOs, after Tim Mayopoulos’ resignation from the Fannie Mae leadership last fall and the impending retirement this year of Freddie Mac chief Donald Layton. Not only that, but the Democratic capture of the House majority has meant changes in leadership in key committees — notably the powerful House Financial Services Committee, now chaired by Rep. Maxine Waters, D-Calif.

So what dothese changes portend?

“Mark Calabria, a very well-known economist, has very well formed views in housing finance, and the government’s role in housing finance,” Rippert said. “… My own belief in what we really want to watch is, what will Mark do with his point of view, in terms of what the government’s role should be in housing finance, and how they will try to exert influence over these new senior leaders at both of these institutions. And so that’ll be an interesting dynamic that plays out.” He expects that Calabria will exert some influence over the new senior leaders at both GSEs in terms of overarching philosophy and thought process — perhaps keep them more aligned with his view as to their primary mission.

Especially with new people heading the GSEs, Calabria will be in a position to have significant influence in charting their courses, Rippert noted: “Mark will be in a pretty unique role to say, ‘I’m not sure I’m completely aligned with the behavior that was tolerated from the enterprises under the prior director of the FHFA, and it’s time for me to maybe adjust some of that behavior.’”

It’s a highly influential position on a national scale, Rippert said, when you consider the MBS (Mortgage-Backed Securities) that the GSEs put in the market (including the TBA market) are second only to the U.S. Treasury in terms of size in capital debt markets, on a global scale. “So the potential to impact and move the economy based on policy divisions is massive. It’s a hugely powerful position, potentially to move the economy in one direction or another.” And of course, the state of the economy will be a big factor as we roll closer to the 2020 election year.

On the legislative front, Rippert said, the politicians attaining key roles are people to watch — but even more so are the people around them, their knowledgeable staffers — “dedicated public service employees, really concerned about the issues, really knowledgeable and informed about the issues, and working very hard.”

“Frankly, I think the best thing that someone like Arch can do as an industry participant is make ourselves available to those very important staffers and assist them, if you will,” he said. “On a very fact-driven, data-driven basis, help them understand the issue, provide them with data and information, and obviously they will make up their own minds about things — but for us to step up and do our job as an industry participant, assisting them in getting there.”

As for the GSE leadership, Rippert encourages more transparency and better communication about the pilot programs at Fannie Mae and Freddie Mac — the motivation for the initiatives and how they fit into the big picture of the entities’ mission of making affordable mortgages available to modest-income buyers. Last year, for instance, the FHFA announced the two GSEs would end their single-family rental pilot programs, in which they financed the purchase of single-family homes to be used as rentals.

“I think that if I were in the position of leading one of these entities, I would think one of my primary responsibilities would be — to the greatest extent possible, to the greatest extent I could, within the bounds of doing what the FHFA as my conservator allows me to do — I would think it would be my job to communicate more fully, more transparently, about the motivation for doing some of these. … Explain not just to the Senate Banking Committee, the House Financial Services Committee, other areas of the administration, Treasury, but also to industry as well.

“I would think that that is a key responsibility, and frankly, a key leadership responsibility of the senior leaders of the two enterprises.”



Andrew Rippert

Andrew Rippert is the Chief Executive Officer of the Global Mortgage Group at ACGL, previously serving as ACGL’s Chief Executive Officer of Global Mortgage Insurance and Reinsurance since 2014. In addition to his global leadership position for Arch Mortgage Insurance, Andrew serves on the board of directors of the Mortgage Bankers Association (MBA) and the MBA’s Opens Doors Foundation. He is also a member of the Executive Committee of the Housing Policy Council and a voting member of the MBA’s Residential Board of Governors, the association’s senior policy making body in the residential mortgage space.

Dave Stevens

David H. Stevens, CMB, is Senior Advisor at Mortgage Media, and former SVP of Single Family at Freddie Mac, former EVP at Wells Fargo Home Mortgage, former President and COO of the Long and Foster Realty Companies, former Assistant Secretary of Housing and FHA Commissioner, former CEO of the Mortgage Bankers Association