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32 REDIRECTING DEFAULT RISK A new report co-authored by Robert C. Pozen, nonresident fellow of the Brookings Institution and a senior lecturer at MIT Sloan School of Management, and Clayton Pfannenstiel, a graduating MBA student from this same school, took a deep dive into the mortgage default market. Specifically, it mined the issue of moving that risk from taxpayers to investors. Here, we telegraph the key points and look at how that notion could affect you. Ever since the financial crisis, the Fed has expanded its role in propping up the residential mortgage marketplace, the authors wrote. Although the current outstanding balance of single-family mortgage debt sits a smidgen below the 2008 high of $11 trillion, the share of new home mortgages guaranteed by the GSEs and related federal agencies now eclipses 70 percent, compared with about 35 percent in 2006. "ese statistics raise important policy questions about the U.S. government's role in supporting the home mortgage market during normal times and in housing recessions," Pozen and Pfannenstiel say. "After the financial crisis of 2008, taxpayers have rebelled against bailing out financial firms in the mortgage market. Yet, public officials still endorse government subsidies to help achieve the social benefits of homeownership." As such, the report explained that Congress is unlikely to mobilize a bipartisan majority to pass any of the proposed reforms. "At one end of the spectrum, some Republicans have called for the reprivatization of the GSEs, on the assumption that the mortgage market could function without any government guarantee," they wrote. "At the other end of the spectrum, some Democrats want to treat GSEs as public utilities owned or regulated by the federal government." Consequently, the task of trimming taxpayer risk within today's mortgage space has been left to the GSEs, they say. So far, the largest GSE initiative has been Fannie Mae's Credit Risk Transfer (CRT) program (which is known as Connecticut Avenue Securities, or CAS). "We applaud Fannie Mae's efforts to date, especially those to expand the investor base for CRTs by adopting a better tax structure," Pozen and Pfannenstiel wrote. "Nevertheless, we believe that Fannie Mae should increase the amount of credit risk it transfers to CRT investors, and the guarantee fees charged by Fannie Mae to mortgage originators should be based on the implied guarantee fee paid to CRT investors." Despite the success of CRTs, the authors believe Fannie should continue to examine two key questions: How much risk should the firm transfer using the CAS program? And what should the effect of CRTs be on the guarantee fees charged to mortgage originators (and passed on to borrowers)? ey concluded their paper with the following commendations and suggestions: "In short, although the prospects of legislative reform of the GSEs are dim, innovative officials at Fannie Mae have created CRTs, which lessen the risk for taxpayers without disrupting the government's support of home mortgages. We applaud Fannie Mae's efforts to expand the market for CRTs, especially by adopting a better tax structure. We encourage Fannie Mae to expand the amount of risk transferred by CRTs to investors in order to protect taxpayers from an even worse financial crisis than 2008. Finally, the FHFA should rely on CRT pricing to lower the guarantee fees charged by GSEs to mortgage originators in order to lower the cost of home mortgages to many borrowers." A 'BELOW AVERAGE' HURRICANE SEASON AND A BRIMMING INSURANCE MARKET Homeowners on the Atlantic Coast as well as home insurance companies in these areas may breathe a small sigh of relief at new hurricane predictions, and those in the insurance and reinsurance markets may find optimism in recent market trends, according to a report released by Kroll Bond Rating Agency (KBRA). Colorado State University (CSU), one of the leading hurricane forecasters, is predicting "below average activity" for the 2018 hurricane season, having revised its previous forecast, according to KBRA. e CSU forecast predicted that 11 named storms will occur during this year's hurricane season, which includes the months of June through November. Four of the 11 storms will be hurricanes, and one will be "a major hurricane," according to CSU predictions. "With the decrease in our forecast, the probability for major hurricanes making landfall along the United States coastline and in the Caribbean has decreased as well," KBRA quoted the CSU report, which predicted two "major hurricane days for the entire season." However, there is a 39 percent chance of a major hurricane making landfall somewhere on the U.S. coastline, and "CSU always cautions that it only takes one hurricane making landfall to make it an active season for those residents," according to KBRA. is is not only notable to homeowners but also to insurers and reinsurers, KBRA noted. "Hurricane landfalls, and not just the number of named storms, is the greatest concern for property insurers, reinsurers, and homeowners," it said. "Fortunately, the landfall probabilities for 2018 were significantly reduced from the April forecast and are well below the historical average," the report said. e catastrophe reinsurance market, which sells insurance for insurers, entered 2017 with pricing the lowest seen in decades and availability at all-time highs, according to KBRA. While some predicted the losses incurred in 2017 would lead to price increases in the reinsurance market—as has often been the case in the past—this hasn't quite played out. In fact, the reinsurance and insurance- linked securities markets are performing well, according to research released by JLT Re, the fourth-largest reinsurance broker in the world, at the start of the month. JLT Re noted "dedicated reinsurance capital at record levels despite the biggest catastrophe loss year ever in 2017," and characterized the reinsurance market as "awash with capacity."

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