CRT Deals May Raise Financial Accounting Questions

According to a recent article in National Mortgage News, the growing popularity of Fannie Mae and Freddie Mac’s (the “GSE's”) credit risk sharing deals is now raising questions about how such transactions should be accounted for in financial statements. Credit risk sharing transactions (“CRT”) are generally considered as an innovative way for the GSEs to off load to the capital markets some of their residential mortgage loan credit exposure and have been an important way to bring private capital back to the residential mortgage market. As the article explains, CRT costs are currently taken into account in calculating the GSEs in net interest income, which is defined by generally accepted accounting principles (“GAAP”). Up to this point, CRT deals have not been designated material enough to appear as a standalone item in the GSE’s non-GAAP financial details, “but if these activities become a more significant component of the GSEs’ businesses, it’s unclear at this point how they would be reported.”

According to Freddie Mac CEO Donald Layton, “[W]e don't issue specific measures because there are no standards out there as exactly how to measure this.” Freddie is allegedly considering reclassifying CRT deals as part of revenue from G-fees because they result in a reduction to G-fee income. As Andy Davidson, President of Andrew Davidson & Co. and consultant who helped develop the structure for some of the GSEs’ risk-sharing products, explains, “Instead of them earning that guarantee fee, someone else is earning at least a portion of the guarantee fee."

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