WASHINGTON, DC—Freddie Mac and sister GSE agency, Fannie Mae, have become expert in handing off risk to the private sector. Granted, the GSEs do so in ways that reward investors for taking on the risk. But, oh what a difference from the GSEs' approach to risk fifteen years ago.

Fifteen years ago, the GSEs were a benign presence in official Washington and almost a nonentity in the multifamily capital markets.

It wasn't until 2001 that the precusor to the Federal Housing Finance Agency, the Office of Federal Housing Enterprise Oversight (OFHEO), had developed long-awaited risk-based capital rules for Fannie Mae and Freddie Mac. These guidelines covered the type and amount of non-mortgage investments held by the GSEs. Other requirements addressed safety and soundness issues and when OFHEO would exercise its enforcement authority.

Fast forward a few years later and the GSEs presence -- at least Freddie Mac's -- had become a little less benign.

Accounting irregularities had been uncovered. Restatements had been necessary. Freddie Mac had the bad luck of retaining Arthur Andersen as its auditor partner before the Enron implosion. It had to start over with PwC. A notebook requested by PwC had been altered and the then-president of Freddie Mac, David Glenn, along with other executives were terminated.

Congress convened hearings and, among many other witnesses, summoned the then director of OFHEO, Armando Falcon Jr., to the hot seat the Hill.

All things considered, Falcon discharged himself well, ending on this note: "In summary, Mr. Chairman, is this a serious matter? Yes. Is there a crisis? No. While challenges lie ahead, Freddie Mac remains safe and sound."

Unfortunately, as we know now, events would unfold quite differently in the coming years.

As for Falcon, he would be forced to resign in 2003.

CORRECTION Aug. 4, 2015: Armando Falcon Jr., was asked by the White House to resign on February 4, 2003, the same day the agency report on the systemic risk posed by Fannie Mae and Freddie Mac was released. That same day, the Administration also announced its nominee to replace him. The White House decided to pull its nominee and asked Falcon to remain in his position and he continued to serve a year beyond the end of his scheduled term. He left in May 2005 on his own volition. The testimony from which Falcon is quoted occurred on July 17, 2003. The article misstated this timeline and leaves out the circumstances regarding his return and ultimate departure in 2005. We apologize for the omission.

The World Crashes. Fingers Point

Fast forward a bit more to 2009. The global economy was in crisis and financial institutions were desperately hanging on by a thread. Bailouts of the largest of these entities would be required to keep the world from going into free fall and that included the GSEs. The FHFA placed them into conservatorship in September 2008 and the US Treasury Department established Preferred Stock Purchase Agreements (PSPAs) to make sure they maintained a positive net worth.

The GSEs were now anything but benign institutions and certainly no longer the beloved provider, albeit indirectly, of finance for home buyers and multifamily investors. In some quarters they were blamed for fueling the subprime mortgage crisis, although in truth the crisis was far more complicated.

Talk had turned to dismantling them and stat.

In fact, the GSEs are still under conservatorship to this day, despite the fact that they have returned every cent they were given during the bailout. And there is still the expectation in official Washington that they will be dismantled or privatized sooner or later.

Or is there?

At the start of this year when the White House released its budget for fiscal year 2016, it included one eyebrow-raising line item: it assumed that Fannie Mae and Freddie Mac could return $191.2 billion in profits to the US Treasury over the next decade if they continue operating under federal conservatorship.

Not to state the obvious but clearly this line item assumes 1) the GSEs will remain under federal conservatorship for another ten years 2) their profits will remain in government hands and 3) the GSEs will continue to bring in record profits.

Indeed, there are the plans to refine the GSEs' capital raising prowess even further. For the last two years work has been underway on a concept called The Common Securitization Platform and Single Security. It is a joint initiative of Fannie Mae and Freddie Mac under the direction of the FHFA to develop a single mortgage-backed security that will be issued by the GSEs to finance fixed-rate mortgage loans backed by one- to four-unit single-family properties. At the beginning of this month, in fact, Fannie Mae and Freddie Mac announced the formation of an Industry Advisory Group to provide feedback and share information on efforts to build the CSP, as it is called.

A Very Specific Short-Term Goal

And here we are. Freddie and Fannie serve at the pleasure of the Administration and Congress while the FHFA carries out its mandate as dictated by the former.

But while the long-term vision of what role the GSEs will play is still a bit murky, their short-term marching orders are so, so clear. No more taxpayer bailouts! No more risk!

To that end, the GSEs have gotten downright creative.

It has introduced solution after solution that manages to satisfy investors' craving for GSE paper (conservatorship or no, GSE paper is in high demand among fixed-income investors), originators' demand for volume and borrowers' need for financing -- all the deftly moving the risk off its balance sheets. Credit risk transfer is now their middle name.

Innovations in Credit Risk Transfer

Earlier this month, for example, Freddie Mac debuted its first two Agency Credit Insurance Structure transactions.

ACIS provides coverage based on both first loss and actual losses realized off a reference pool of residential mortgages.

Basically what Freddie Mac has done was move much of the remaining credit risk associated with two Structured Agency Credit Risk STACR debt notes executed earlier this year to a panel of insurers and reinsurers. These two policies cover up to a combined maximum limit of approximately $223 million of losses that Freddie Mac incurs when homeowners default.

Here I should not that the STACR structure was in fact developed with the goal of transferring some of the risk to the private sector. The insurance policies are in place to cover losses the structure doesn't address.

Freddie Mac began insuring its transactions in 2013; with this deal it has acquired more than $1.7 billion in coverage, according to Kevin Palmer, vice president of Freddie Mac Single-Family strategic credit costing and structuring.

Fannie Mae, as the two agencies usually do, followed suit rather quickly. In mid-July it announced it has completed an additional credit risk sharing transaction by shifting credit risk on a pool of loans to a panel of reinsurers.

Investors are not dismayed in the least; indeed they have flocked to this paper. Since the launch of STACR and ACIS, it has since grown its investor base to more than 160 unique investors, including many of the largest money managers in the U.S.

Fannie Mae launched its own variation of this product, called the C-deals series – aka its Connecticut Avenue Securities platform, around the same time. The two went on to tweak and refine these credit risk transfer mechanisms, with insurance for example and with actual loss structures.

The latter refers to transactions that instead of allocating losses to the debt notes based upon a fixed severity approach, they are allocated based on the actual losses realized on the related reference obligations.

Investors still continue to flock.

Yesterday, as Fannie Mae announced its own reinsurance initiative, Rob Schaefer, vice president for credit enhancement strategy & management said that "we are pleased that this form of risk transfer has been well received by the market and, based on the indicated support by the reinsurers, we intend to bring similar transactions to the market in the future."