Hedge funds, leverage and mortgages: why Fannie and Freddie's new deals worry some experts

Hedge funds have been keen buyers of the new mortgage risk-sharing deals issued by Fannie Mae and Freddie Mac, but as spreads have tightened, worries about leverage have grown. Some now argue mortgage finance requires a more stable source of capital. By Kris Devasabai

Chris Acito at Gapstow Capital Partners
Chris Acito, Gapstow Capital Partners

Politicians in the US are working on blueprints for a revamped housing finance system, in which private investors become the primary insurer of mortgage credit risk – a market that could amount to $250-450 billion over a five-year period, according to estimates. But while the haggling continues, a dry run is already taking place, and some observers don’t like what they see.

Over the past nine months, Fannie Mae and Freddie Mac – the tarnished government-sponsored enterprises (GSEs) that will be

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Credit risk & modelling – Special report 2021

This Risk special report provides an insight on the challenges facing banks in measuring and mitigating credit risk in the current environment, and the strategies they are deploying to adapt to a more stringent regulatory approach.

The wild world of credit models

The Covid-19 pandemic has induced a kind of schizophrenia in loan-loss models. When the pandemic hit, banks overprovisioned for credit losses on the assumption that the economy would head south. But when government stimulus packages put wads of cash in…

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