Diversifying Risk: The Benefits of Reinsurance and Credit Risk Transfers

the GSEs and exposing taxpayers, CRT's distribute risk across a broad base of market participants, including institutional investors and reinsurers. This structure enhances systemic resilience. The CRT market has grown substantially over time, both in size and sophistication. CRT issuance has hundreds of billions of dollars in mortgage credit risk to the private sector. This growth has not only reduced taxpayer exposure, but has also created a mechanism through which credit risk is continuously priced by market participants. It is useful to identify the two complementary CRT markets that coexist. The first is the reinsurance market. in which reinsurers assume mortgage credit risk through structured agreements. The second is the capital markets CRT segment, in which risk is transferred through tradable securities. These securities are issued to investors and actively traded, providing ongoing price discovery of risk. The availability of such information is critical. for financial stability. Accurate pricing of credit risk can serve as an early warning system of potential catastrophe, signaling structural weaknesses before they escalate into systemic crises. By contrast, when risk is underpriced and obscured, as was the case in the run-up to the two thousand eight, financial crisis, risk can build unchecked, CRTs help prevent the catastrophic outcome of of this catastrophic outcome by embedding transparency and market discipline directly into the housing finance system. Thus, the CRT market is a vital component of a modern resilient housing finance system. By transforming risk to the private sector, providing transparent and continuous pricing of credit risk, CRTs enhance both market efficiency and financial stability. CRTs, however, are not a substitute for managing risk, particularly if and as the privatai privatization of the GSEs is contemplated. A recent convening by the Penn Institute for Urban Research, which I co-direct, brought together leading public and private sector stakeholders to affirm key principles for the reform of Fannie and Freddie Mac in contemplation of privatization foremost among them are first pr- preserving the affordability public mission of the GSCs and second ensuring market stability. Embracing these principles must be a foremost priority in ensuring a resilient housing market to safeguard taxpayers, promote long-term financial stability, and support broad-based access to sustainable home ownership. Thank you. I look forward to your questions.

Thank you for your testimony. We'll now turn to member questions. I now recognize myself for five minutes for questioning. Mister Vidovich, can you help us understand how the reinsurance market currently views U. S. catastrophic risk, and are they willing to take on catastrophic risk in higher risk areas?

Uh, thank you for the question. Uh, the reinsurance industry is quite vibrant. Uh, capital is continuing to enter that market uh and rates for catastrophe reinsurance in a number of uh cat prone areas uh are declining, because we are seeing increased competition because of that inflow of capital. For example, in Florida, which we have heard from Mister Theodoro and in my own remarks, has a history of being prone uh to a number of cat risks, including uh hurricanes. We are seeing a significant new capital come into that market, which is driving down the cost of cat reinsurance premiums. We're also seeing new entrants come into that market to assume that risk. So the private market is responding and is quite vibrant.

Continuing with you, sir, um, how could catastrophe bonds fit into the broader risk sharing ecosystem, as we look forward? Uh, first, for those at home who may not know, just maybe explain what a catastrophe bond is and then speak to the role catastrophe bonds play in the property and casualty market.

Of course. So a catastrophe bond is a bond, uh, but at its core is a reinsurance contract. An insurance company will cede risk to a special purpose vehicle which will issue bonds to other capital providers. The cost of those bonds are used as collateral to insure that the losses are paid, and those bondholders get uh an interest payment or a coupon based on the investment income that those assets earn. but also uh based on the premium paid by the seating insurer for that type of reinsurance.

So just to clarify, there's room for both catastrophe bonds and reinsurance. This is in our market.

A- a- actually catastrophe bonds are simply a form of reinsurance. So reinsurance is an umbrella term, so the answer to your question is absolutely there's room for both. Uh, it is a type of tool.

With, I appreciate I appreciate that. Let's pivot to CRT only because I'm limited on time. Mister Walker Uh, as it relates to c- uh, credit risk transfer, uh, what types of investors are most interested in CRT and what typically drives that interest?

Uh, thank you for the question. I can speak to the reinsurance marketplace for CRT, which is comprised of US insurance companies, Bermudian reinsurance companies, Lloyds of London entities, as well as continental European reinsurers. It's a diverse global, you know, financial system supporting US CRT. The draw is that it's a diversifying risk. There's a significant amount of data available to price and analyze the risk. And so reinsurers are eager to continue to diversify their balance sheets and evaluate the risk that's highly data rich.

Can you, Mister Walker, speak to how the enterprises have been using CRT since the latest iteration of the capital rule back in twenty twenty? And then also, do you anticipate any changes to attachment points for CRT in the future?

Yeah, I mean the GSEs have more or less continuously used CRT since its inception in twenty thirteen. When the enterprise regulatory capital framework was released in twenty twenty, finalized in twenty twenty one, uh we did see some change in the GSE attachment points and detachment points, driven by uh dynamic aspects of that capital framework. Uh it's something that as a broker we work all the time with the GSEs on, trying to figure out how to evaluate the structures, make them capital efficient, and balance risk transfer in the process.

Alright, I wanna switch briefly to the National Flood Insurance Program, or NFIP. This is for Mister Vidovich and Mister Walker. Can you speak very briefly, I only have fifty seconds, to how the NFIP uses reinsurance, what kinds of reinsurance does it use, and what risk does it usually use it on?

So briefly, it uses uh a number of different types of reinsurance. but including traditional treaty reinsurance which transfers the risk of flood losses to the private market.

Mister Walken. Yeah, I don't have anything to add other than traditional reinsurance and catastrophe bonds are both part of their program.

I just add that I think it's imperative that the NFIP be buying uh reinsurance uh for its policyholders and for the taxpayers. With that, I yield back and it's my pleasure to introduce the ranking member of the Subcommittee on Housing and Insurance. Mister Cleaver, you are recognized.

Thank you, Mister Chairman. Um The FHFA attachment points. Uh, since twenty twenty-two, twenty-three, uh, the enterprises have shifted toward higher attachment points for uh CRT. Some h- have have even argued that This leaves more risk with taxpayers that private capital should absorb and has an impact on the CRT's market discipline function. Uh, Mister Walker, you uh talk about this in in uh your uh testimony uh today uh and uh finding attachment points that balance risk transfer and cost uh capital would move the program closer to its original intent. Um, what, in your opinion, should this balance look like?

Thank you for the question. As I mentioned in my statement, um, that is a policy question, but at the end of the day, what we're trying to do is figure out how to kind of be effective in the capital relief that the GSCs are getting, and balancing the risk that's being transferred and shared uh with private capital. So those attachment points currently would not transfer a significant portion of a great financial crisis. It would be largely retained by the GSEs under the CET programs that they're currently buying. Uh, prior to twenty twenty and the enterprise regulatory capital framework, those were much closer to the risk, sharing a lot more risk with the private sector.

Thank you. Uh, that that that's helpful. Um, uh, I wanna move over. Um, uh, uh into conservatorship. Um facilitating uh uh a a robust and competitive CRT market uh improves profitability and the value of taxpayer investments in the enterprises. Uh one of the the the the vital reforms for future success in whatever form the GSEs may may take. uh is um uh entrenching and codifying the CRT and reinsurance programs. Um uh Miss Watcher, thank you so much for for being here every time we send out the signal. Thank you very much. Uh you've testified uh in the past about uh what works and what considerations for future GSE reform should be scrutinized. What should c- what should we, what should this committee uh keep in mind during these discussions? What - what are the important things you would like for us to address?

Thank you so much for the question. I think there are two major points that we can take from our experience with CRT_s and tremendous amount of work that has gone into developing and implementing the CRT market. on the part of the GSC's and private sector participants. And those two are the following. First, the CRT market works to offload risk and in any privatization plan, in any contemplation of privatization, we absolutely should preserve the CRT function. That should be codified in the privatization. We should not enable privatization without continuous exposure of the risk. that occurs under the GSCs, whether they're privatized or not, to public uh uh identification and potential response. Second, using the CRT market to continuously price risk is appropriate for information purposes, but it would be pro-cyclical and potentially destabilizing if privatized entities the GSCs as privatized would use the price of risk for their pricing of default. That is a problem that has not yet been resolved in terms of the consideration consideration of how the GSCs are to be privatized. How will G fees be determined? G fees are the public facing public charge, charged to more mortgage holders for risk. If that G fee were to be driven by CRT pricing, it could be potentially very destabilizing to the system. And the research that we've seen and the experience we've seen underlies that. So those are the two principles that I would argue for in terms of contemplation of privatization.

Thank you. Thank you very much. Thank you. Shandryn.

The gentleman yields back. The gentleman from Wisconsin, Mister Fitzgerald, is now recognized for five minutes.

Thank you, Chairman. Uh, Mister Walker, private, so private mortgage insurance helps first time and I would say working class buyers access home ownership. And it safeguards taxpayers from credit risk. Um, it's kind of the original form of credit risk transfer, I guess you could describe it as. Uh, the industry has grown more resilient through consistent mortgage insurance CRT transactions. uh which has been i guess ensuring support for new buyers and claim payments uh during all kinds of economic turmoil can you discuss how mortgage insurers use CRT to manage risk uh and how has it made the housing market stronger and then uh that would also include forward transactions covering uh any of the future business and how it's has supported efforts to uh diversify the um the industry's capital base.

Thank you, that's a great question. Uh, and I would agree with your statement that private mortgage insurance is, you know, an original form of credit risk transfer, which is an important note. Um, the mortgage insurers have actually gained the same benefits that we've been discussing here today from credit risk transfer that the GSEs do. And most importantly, you've heard all the panel members here talk a lot about diversification. Um, it's effectively taking what is largely monoline mortgage risk in a private mortgage insurer, and sharing it, and spreading it out with a bunch of private entities, uh, either in bond form or in reinsurance form. And so the mortgage insurance industry has really leaned into credit risk transfer. Um, they've been consistently purchasing it since twenty twelve or twenty thirteen. And they use it to transfer both risk and get favorable capital relief from those transactions. In the last couple of years, they've really leaned into forward reinsurance protection, which provides them coverage on loans that they will insure in the future. And that's very helpful to them because it gives them clarity and certainty as to the amount of protection that they have in place, as well as the price of that protection in place, which has really been a huge benefit to the mortgage insurance industry, and has made them much more resilient compared to pre-great financial crisis where they retained most of the risk themselves.

Very good, thank you. Uh, Doctor Wachter, I believe the credit risk transfer can play a role in continuing to insure uh, Fanny and Freddie are significantly less risky than before the financial crisis. Um, but I think there is a concern uh about CRT, that it's been underused uh tool by them for in recent years, I guess you could say. So what are your thoughts on CRT using Fanny and Freddie, particularly regarding concerns of the ability for CRT to be uh counter uh cyclical and premay prepayment risk eroding coverage. Um there uh it it could be I guess characterized as uh under collateralized counterpart counterparty risk. Um I know it's kind of that question's kind of all over the place, but if you could try to respond to that.

Thank you so much for the question. Uh, the use of CRT can evolve over time. It already has. It's become more sophisticated and it can evolve further. Uh, but the use of security CRT, which I will d uh base my response to your question on, uh, definitely it depends on the capital rule. Uh, many economists um consens there's a consensus among many economists that the capital rule is too stringent. and may actually be undermining of future profitability. If so, with and I do think capital is very important, obviously uh economists agree on that. Uh it's not a su- CRT is not a substitute for capital at all. But if the capital rule is less stringent, there will be more of a role for CRT. So I see that as a likely happening going forward.

Very good. Um Mister Videovic? Uh, do you believe that Fannie Mae and Freddie Mac's regulatory capital rules are sufficiently aligned with the actual credit risk characteristics of the underlining mortgages such as loan-to-value ratios, borrower credit scores, debt-to-income ratios, and product structure?

Thank you for the question. Uh, in our view at the RAA, uh, and in the reinsurance industry, we think the GSEs have a effectively use CRT to address an aligned interest along the lines that you've described. Uh, but as Mister Walker has uh stated in uh answers to his questions and testimony, we think there is additional opportunity to leverage the private markets,

Sorry to interrupt you.

so as to further reduce taxpayer exposure.

The gentleman's time is The gentleman's time has expired.

Thank you. Thank you.

Thank you. Gentleman yields back. The ranking member of the Financial Services Committee, the gentlelady from California, Miss Waters, is now recognized for five minutes.

Uh, doctor. The trump appointed uh FHFA director, uh Bill Pulte has taken unprecedented action that calls the government of FHA uh and the GS Cs into question. He has illegally appointed himself chairman of both enterprises, fired their most experienced leadership, and weaponized the GSEs for political targeting. Now, instead of addressing the affordable housing crisis, Paul's team has exacerbated it by rolling back and weakening critical policies, like fair lending, fair housing, equitable housing finance plans, and the affordable housing goals. He rescinded earlier guidance of the GSC's on how best to identify and assess climate risk and is often unserious housing proposals like the fifty-year mortgage, which would lock homeowners into mortgage debt for the rest of their lives. Doctor Wachter, are the tools available to Congress that we should consider so that we can respond and mitigate the kinds of governance risks posed by the director to our housing finance market.

Thank you for the question. As a nation, we are in the middle of a housing affordability crisis, which hits young households and underserved communities very, even more strongly than uh the case for for um most Americans. If you don't own a house today and you're young, this is a crisis. I do believe that there are tools that are available, and I do believe that there, these tools can be used more than they are right now. So I thank you for the question.

Doctor Walter, if the enterprise has created innovative pilot programs for new mortgage products, for instance, related to manufactured housing or small dollar loans, how could CRTs be used to manage the default risk? with those pilot programs as the pilots uh are being evaluated.

Uh, Chairman uh uh uh Congressman Waters, uh this is not an area in which I specialize. However, there's an excellent paper that I would like to reference by David Brickman, and he has a proposal that goes directly along those lines, which absolutely should be evaluated.

Well, or could there be a staggered approaches, taken to test this type of approach? For instance, where pilot volumes are initially held small and GSC is held up, higher portion of the risk, do you see this as an effective use of CRT's?

Uh, so again, this is a very important issue and one which, uh, I'm grateful to have, uh, David Brinkman's expertise and I think it needs to be considered.

But effective.

Well, I have, I can't speak to the intricacies because I haven't studied it as yet. Thank you.

Well, I thank you and uh if you believe there are things that we could do, we could be using some of the rules uh that we have available to us,

Oh, absolutely. There are.

then I'd like to talk with you a little bit more and we can uh begin to identify what those are so that we can utilize them, because this is an important time for the us to address these issues.

I appreciate that. Thank you.

OK, thank you. For being here, I appreciate uh your assistance and I yield back.

The lady yields back. The Chairman of the Full Financial Services Committee, the gentleman from Arkansas, Mister Hill, is now recognized for five minutes.

Thank you, Chairman. Again, thanks to our witnesses. Appreciate you helping us uh work through the issues surrounding the use of of reinsurance. And so much of this is offsetting loss for the taxpayers, and at the end of the day when the losses come due, trying to figure out who's left, to make those major payments. And risk transfer tools as we've established today in reinsurance, uh credit risk transfer all help answer that question on who picks up the those losses uh by bringing private capital in before losses or or fall on the backs of taxpayers. So I thought we might I might focus on how the tools work actually in practice and start with you uh Mister Walker um Credit risk transfer was designed to move mortgage risk off the GSE's balance sheets and bring in private capital, but the real question is not whether the risk is transferred, but what layer of risk is an actually transferred. I referenced this in my opening comments and if if uh the CRT buyers get the easy part, uh then that's that gives a modest benefit, but you know, I'm interested in the structure. So, as CRT structures have evolved, they've shifted towards higher attachment

Yeah, thank you for the question. Um, it is true that the attachment points on GSE CRT programs have increased in the last couple of years. Uh, but recently we're actually seeing a trend where they're starting to come down a little bit. So it is something that we're currently evaluating and constantly looking at.

What what would be the reason for that? Would it be that the perception is that the CR the uh Fanny and Freddie uh uh underwriting is weakened and therefore uh that reinsurance is less likely to take um a broader selection of the losses? Or or what what accounted for that attachment point issue?

I think the increase in attachment points was a balancing procedure around effective cost of capital and building retained earnings, which the GSEs are allowed to do at this point in time. And the subsequent, you know, slight decrease in attachment points has been part of the constant evaluation of market pricing, risk, transfer, and capital relief.

How should we balance that trade-off when we ask questions about it or think about it? How do you think we should be, as as we review the potential release of Fannie Mae and Freddie Mac from conservatorship. How should members think about that?

I agree with the Doctor Wachter that under any future vision for the GSEs, credit risk transfer will be an important component. And I think the determination of what the correct attachment points will be is solely a function of how much risk you want the GSEs to retain, versus how much risk you want shared with the private industry.

Mm-hmm. We turn to you, Mister uh Theodoro. Um, we've heard for a new, when I travel around the country I'll occasionally go to an insurance brokerage type meeting and uh there's no risk that they wouldn't like to see transferred to the federal government in in some of those meetings. And so there's a decade-old effort to have a massive form of government-backed reinsurance. But the purpose of risk transfer is to move risk away from

Well now there is more capital. As as we've heard, the catastrophe bond market insurance link securities is very vibrant. Last year was the strongest year on record for issuance of uh catastrophe bonds, uh you have other risks that are also being the subject of catastrophe bonds, as the industry matures, including wildfire and uh cyber and liability risks which were sort of off limits because of the long duration of the claim. So you've got more private capital that's coming in, there's more interest in the reinsurance and insurance industry when we spoke about uh Florida before new capital is coming in, and also another indicator of the health of the of this of the market is uh look at what does Wall Street say? The biggest Florida insurance company is Universal. A year ago it was trading at sixteen dollars a share, yesterday it closing about thirty-four, so more than doubled. So Wall Street analysts like insurance, they think that insurance companies and reinsurance companies are doing a good job with their uh calculations of probable maximum loss and maximum possible loss. It's much more soph- soph- sophisticated industry than it has been for the last twenty five, thirty years. So yes, more private capital coming in.

Very good. Well, thank you for that. And Mister Floyd, thank you for this hearing. Yield back.

Gentleman yields back, the gentlewoman from Colorado, Miss Pedersen, is now recognized for five minutes.

Thank you, Mister Chairman, and thank you all for being here today for such an important discussion. I, you know, the national state housing is in is dire. Nationally, home prices have surged nearly fifty percent and rent is up nearly twenty-five percent in just the last five years alone. And on top of this, we're seeing a drastic increase in insurance prices, which is making it just untenable for families, especially in Colorado, uh, as we have contributing factors of uh hail damage that are the number one reason for increase in costs, but also wildfire risk. So, Mister Walker, given the risk from extreme weather that are growing and compounding, such as droughts contributing to extreme fire risk and landslides following flooding and wildfires. How are current and future climate risks assessed by the reinsurance and credit risk transfer markets?

Thank you for your question. Um, I'll answer that question from a credit risk transfer perspective as I'm not a property expert, but um, property risk does come into play with credit risk transfer. Um, those protections are in place regardless of the reason a borrower So if there is a natural catastrophe and a default happens because of it, uh credit risk transfer is there to kind of cover those claims. So re-insurers do evaluate their credit risk transfer exposure from a natural catastrophe perspective.

Mm-hmm.

Uh and the current reality is there's not as much risk being transferred given the attachment points of those programs, but they do evaluate it and they have modeling to kind of evaluate and price it.

Doctor Wachter, while the severity and frequency of high loss events continue to increase, unfortunately, the FH the FH my the FHFA, oh my goodness, sorry about that, has taken multiple actions that undermine climate risk transparency, including revoking climate risk management requirements for government-sponsored enterprises and withdrawing from the network of central banks and supervisors supervisors for greening the financial system. Is there a risk of investors pulling back from the American housing market, and how might that impact prices for American homebuyers?

Thank you.

Thank you for the question. Uh, if I may, um, with, uh, co-authors, we have a recent paper that was published, uh, just, um, in twenty twenty five on climate risk in mortgage markets. And I would like to point to the work there which shows that CRT's do indeed price uh the risk that comes from climate events. And so that it's very useful for that purpose as well. Uh I am aware that FHFA has pulled back its climate uh research. I do think more data on climate risk and uh is is absolutely critical and in the mortgage market it's particularly important for. So I would hope to see more research going forward.

Thank you. And uh another follow-up question, Doctor Wachter, as communities are becoming increasingly at risk of devastating losses, they're also facing uncertainty as insurance companies are completely pulling coverage out from communities. When I meet with some small business owners, you know, just outside of the suburbs, even in Evergreen, Colorado, they're they're unable to uh insure their businesses and homeowners who are unable to find insurance options, um and are are are fleeing these communities because of uh the inability to to find any options. So what happens to the communities that don't have anywhere to turn for insurance options?

This is obviously incredi- incredibly important problem, particularly for uh, states that are exposed to risk, including Florida, California for wildfires. And there's ongoing work, but it, there needs to be much more, and particularly what I would like to see is more cooperative work among reinsurers, insurers, and communities, particularly the communities that are in harm's way to increase the availability of insurance.

And that leads me, uh, to, well, another piece of this, which what role does AI play in modeling risk, in managing reinsurance portfolios, clarifying risk mitigation, and processing claims, and what measures are being taken to ensure that consumer interest in data are being adequately protected? You have four seconds. Not enough. Alright. Thank you very much.

General Lady yields back. I'd like to ask unanimous consent to enter the following letters into the record. We have one from the Smart Safer Coalition, dated April twenty-second, twenty twenty-six, and we have one from the Arch Mortgage Insurance Company, dated April twenty-seven, twenty-second, twenty-twenty-six. Without objections, these will be received. The gentleman from Tennessee, Mister Rose, is now recognized for five minutes.

Thank you Chairman Flood and and Ranking Member Cleaver for holding this important hearing and thank you to our witnesses for being with us today. Mister Vidovich, uh in your testimony you note that increased capital and competition have helped drive down the cost of reinsurance, making it more attractive uh risk management tool, making it a more attractive risk ma risk management tool for programs like the National Flood Insurance Program. You also point out that in some years reinsurers have paid out nearly as much, um, or more than they collect in premium premiums. Given that context, how durable is the current pricing environment if conditions shift and reinsurance costs begin to rise is the industry well positioned to manage those price swings what would that mean for the affordability and availability of coverage for federal programs that rely on it?

Thank you for the question, Congressman. Uh, the industry is quite resilient and capable of meeting risk today and into the future. Uh if we just look at the increased frequency and severity of uh catastrophic uh weather related events, uh the industry has seen uh what used to be an exceptional year of a hundred billion dollars of insured losses. We've seen that seven out of the last ten years, and we've seen losses in excess of that every year for the last five years. Notwithstanding that, capital is moving into the reinsurance space, as I said earlier. Um, in Florida in particular, we are seeing the price of catastrophe reinsurance drop, uh because of the fact that capital is coming in to support the market. There is a home for this risk in the private market.

Thank you, I appreciate that. Doctor Walker, uh in your testimony you emphasized that the credit risk transfer market provides a forward-looking market-based signal of mortgage credit risk where investors actively put capital at risk based on their assessments. How effective is the credit risk transfer market in identifying early signs of deterioration in housing market conditions, or the build-up of systemic risk compared to traditional indicators like delinquencies or foreclosures?

It is extremely efficient, uh, in comparison with existing measures. The existing measures are often delayed, backward-looking, or simply don't operate. So for example, default and foreclosure happen after the crisis, particularly foreclosure can be months, years after a crisis. So it's not a signal at all. Default itself is not a signal of a bubble that's building. Because as a bubble builds, prices increase. And as prices increase, then we have less default currently but more danger of over-leverage and increased defaults and foreclosure in the future, but no sign of it. So as I was watching the leverage and risk build up in the great fin the build up the great financial crisis, I with others was noting, and we weren't surprised, that default simply did not increase. Default is a reaction to a crisis, because after the crisis was revealed, Then, entities imploded, and at that point, defaults increased as prices fell. So they respond to prices, and then the build-up prices go up. On the other hand, it appears, and from our research we have very good information, showing that yes, the credit risk transfer market is operating exactly as it should, and it does accurately price risk. It does price risk, in very, very subtle risk even, it does price. We see that in the um risk of coming from Hurricane Harvey and Katrina, in the paper that, uh sorry, Harvey and Irma, that I, paper I referenced earlier. And we also see it in the COVID experience. In the COVID experience, CRT uh prices gapped out tremendously, as they appropriately should have.

Is

And that occurred.

uh sorry to interrupt you, but in the interest of time, is there a way as policymakers that we can Because what you're saying makes complete sense to me. Is there a way we can tap into that information and

A-

use it more effectively to avert future financial crisis?

Absolutely, there's a way to tap into that. And there is, it is traced continuously, FRAD has the data continuously, so you can watch it, look at it, and in particular I think it would be useful at moments of crisis, such as COVID, to uh to consider it, all policy makers can and should make use of this information. I'm sure many are and there can be more. It's a bit of an obscure market, but it's working.

Thank you. I see my time has expired. I yield back.

Gentleman yields back. The gentlewoman from Georgia, Miss Williams, is now recognized for five minutes.

Thank you, Chairman Flood and Ranking Member Cleaver, for holding this hearing and thank you to all of our witnesses, because we are going through a housing crisis in my hometown of of Atlanta, Georgia, and I welcome your expertise today. Owning a home is one of the most important ways American families build wealth. It's how working families get a foothold in the middle class. And if we wanna expand home ownership in this country, we need the systems behind mortgage lending to work well and fairly. So let me explain what we're talking about today, and perhaps you can help me with this explanation for the people back home. When you buy a home, your bank doesn't just hold your mortgage, it bundles your loan with thousands of others and sells them to Fannie Mae, Freddie Mac. But when those companies are holding all that risk and loans go bad, taxpayers, homeowners, my constituents, the American people, they're on the hook. We learned that the hard way in two thousand eight. Following the two thousand eight collapse, institutional investors bought thousands of single family homes on the cheap, turning Atlanta into ground zero for an investor takeover of the housing market. Credit risk transfer could have mitigated this risk of corporate landlords in Atlanta by enhancing market on risk pricing and reducing the volume of distressed assets available for acquisition. Established CRT markets might have diverted private capital into financial securities, rather than the bulk of purchase of physical single-family homes, according to an analysis of CRT mechanisms in a report from the Federal Reserve Bank of New York. The two thousand eight crash directly contributed to Atlanta's current high-cost housing market. The massive conversion of homes into rentals by investors coupled with long-term under-building of homes after two thousand eight, created a persistent housing shortage that has fueled an affordability crisis that continues to loom in Atlanta today. So CRT lets Fannie and Freddie pass some of that default risk to private investors, so losses don't fall entirely on the American people. Today I wanna understand how well it's working for the financial system and for the families that I represent. Doctor Wachter, in your testimony, you described CRT as a tool for spreading risk broadly, so it doesn't pile up in one place. But what happens when things go wrong anyway? If we hit a severe economic downturn and private investors start pulling back, what does that mean for homeowners who are still making their payments every month? Does stress in the CRT market ripple back to the people at their kitchen table?

Thank you for that question. It's a very important question. Uh, what we saw in COVID was that indeed the uh in March twenty twenty twenty twenty had the price of risk increased dramatically, as unemployment increased to fifteen percent, uh fastest rise in unemployment that we had ever seen. And this was a moment of potential disaster for the United States. There was response, and it was important for the response, the CARES Act, forbearance. These were important programs. The indicators of risk, including the elevated unemployment rate, including the pricing of CRT, were indicators and I'm sure helped inform these this important policy of forbearance. Let me just go to more specifically your question. Using this example. After COVID the G fees were not increased. Do in in immediately post-COVID in twenty twenty. And mortgage rates weren't increased. Fanny and Freddie stayed in the market. If they had been privatized, this would not have occurred. And the health crisis that w- we as a country were undergoing would have been accompanied by a financial crisis as well.

Thank you, Doctor Wachter, and Mister Vydovich, am I pronouncing that correctly? My name's Nikima, so I'll try to get the names right.

It's Vidovich, but thank you.

Vidovich, Mister Vidovich, expanding affordable home ownership is a priority for many of us on this committee, on both sides of the aisle because we know how it's impacting our constituents regardless of what party they vote for. If Fanny and Freddie develop new mortgage products aimed at getting more families into homes, is the private market capable of stepping up in pricing that kind of risk?

So it would depend on the laws and the regulations that would be governing those new programs, but critical to the evaluation of the default risk would be the available data on the portfolios, uh, that would be constructed as a result of those new products. Uh, our industry stands ready where we are able to evaluate the data and define the risk, to provide a private solution, but it would depend on the availability of that data to assess the risk.

Thank you so much. Your testimony today has made it clear that this market is doing important work, and not just to protect taxpayers, but open doors for more American families. And I want to leave here today committed to making that happen. And with that, Mr. Chairman, I yield back.

Gentlelady yields back. The gentleman from Montana, Mister Downing, is now recognized for five minutes.

Thank you, Mister Chairman, and thank you to the uh witnesses uh I I'm I'm happy we're having this uh hearing to explore ways that federally backed programs can, and have been, reducing the risk of losses borne by taxpayers. of particular interest to me has been NFIP, the National Flood Insurance Programme. Uh, and I wanna make sure that Montana rate payers and taxpayers are not penalized with higher premiums or uh exposure there to subsidize lower rates in high risk areas. That's been a concern of mine. I'm a former insurance commissioner, I've been thinking about this for a while. Uh, but I'm gonna start um a little bit broader about a proposal that's been circulating in Congress and among some think tanks of the idea of creating a federal property reinsurer. And I firmly believe that the federal government should get out of the business of insurance, uh, to the greatest extent possible. And, uh, that's one of the reasons that I have a bill to eliminate FIO, the federal insurance office. I really believe in, um, state-based regulation. I, I believe the private market should take this up. I, you know, so, uh, something that I'm supporting. So I'm gonna start with Mister Theodoru. You know, you've opined on this topic before, and can you explain why federalizing reinsurance continues to be a terrible idea, and one that runs the risk of shifting costs of living in riskier areas along the coast to people living in places like Montana?

Yeah, thank you for the question. Indeed, I've f- have seen that federally backed or federal reinsurance is is not a good idea, because it does the opposite of what reinsurance is designed to do.

Mm-hmm.

Reinsurance achieves a spread of risk. Whereas if you remove the providers of the risk from the global environment and it's strictly done in the United States then you're concentrating risk because the US actually has more natural catastrophes in other regi regions of the world so uh it it's not a good idea from that point. The he the last hearing as Congressman Flood indicated on this subject under insurance was in two thousand seven.

Mm-hmm.

And at that hearing the Chairman of the Council of Economic Advisors, Ed Lazier, made a really passionate presentation on why after two thousand four, two thousand five, the federal reinsurers is not the answer. The um, uh, and I've indicated in my testimony earlier that if you have federal reinsurance that crowds out the private market,

Right.

and it suppresses the transmission of signal of price, and also it does a counter, um, subsidy of uh subsidizing those with large million dollar homes and smaller ones pay for it so on on many fronts it was uh bad idea fortunately it wasn't carried through but it has come up a few times with

yeah

the uh these the similar kind of proposal

yeah well i i i appreciate that thank you for that uh um for your testimony there um uh to shift gears really quickly mister chairman i request unanimous consent to submit for the record mister theodoro's piece titled why a federal reinsurer remains a bad idea

Without objection.

Thank you. Um, now on NFIP specifically, I'm gonna move to Mister Walker here. Can you describe how the NFIP has benefited from private insurance?

Well as discussed uh thank you for the question. So as discussed on this panel, um, you know diversification in private capital has been immensely helpful to a lot of private or public entities. Um,

Yeah, there was a notable increase in reinsurance participation NFIP program from twenty four to twenty five. Um, so

Mm.

Just just to go on, what why why do you think that is?

I'm not an expert in the NFIP program myself, but as Mister Vidovich has testified, um, there is more capital available in the reinsurance industry to take on property catastrophe risks which I assume is correlated.

Thank you, I'll I'll move to Mr. Vidovich. Can you discuss how the NFIP uses the insurance link securities markets to transfer risk?

Yes, so in addition, uh, thank you for the question. Yes, in addition to the use of traditional treaty reinsurance, uh the NFIP has uh gone into the catastrophe bond space and used catastrophe bonds as a way to protect the NFIA NFIP from extreme tail risk.

So, you know, this strategy compared to traditional reinsurance, what are the advantages and disadvantages?

Um, as I testified earlier, reinsurance has a number of different takes a number of different forms um and uh catastrophe bonds uh meet the uh investment needs of a group that see them attractive for that extreme tail risk.

Yeah, well thank you, unfortunately we ran out of time, uh Mister Chair, I yield.

Gentleman yields back, I'd like to thank all the witnesses for your testimony today. Without objection, all members will have five legislative days to submit additional written questions for the witnesses to the chair. The questions will be forwarded to the witnesses for their response. Witnesses, please respond no later than May twenty seventh, twenty twenty six. With that, this hearing is adjourned.

Uh, uh, we need to look at the, uh, the content of the meeting, how many people, how many people, you know, who are not part of the meeting, as well as the, uh, the things that are being recorded on the top of the table, or the, uh, on the screen, or on the screen. So, if you, how many of them are uh, who are on the, uh,

oh