[House Hearing, 119 Congress]
[From the U.S. Government Publishing Office]
DIVERSIFYING RISK: THE BENEFITS
OF REINSURANCE AND CREDIT RISK TRANSFERS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINETEENTH CONGRESS
SECOND SESSION
__________
APRIL 22, 2026
__________
Serial No. 119-71
Printed for the use of the Committee on Financial Services
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
64-156 PDF WASHINGTON : 2026
=======================================================================
HOUSE COMMITTEE ON FINANCIAL SERVICES
FRENCH HILL, Arkansas, Chairman
BILL HUIZENGA, Michigan, Vice MAXINE WATERS, California, Ranking
Chairman Member
FRANK D. LUCAS, Oklahoma SYLVIA R. GARCIA, Texas, Vice
PETE SESSIONS, Texas Ranking Member
ANN WAGNER, Missouri NYDIA M. VELAZQUEZ, New York
ANDY BARR, Kentucky BRAD SHERMAN, California
ROGER WILLIAMS, Texas GREGORY W. MEEKS, New York
TOM EMMER, Minnesota STEPHEN F. LYNCH, Massachusetts
BARRY LOUDERMILK, Georgia AL GREEN, Texas
WARREN DAVIDSON, Ohio EMANUEL CLEAVER, Missouri
JOHN W. ROSE, Tennessee JAMES A. HIMES, Connecticut
BRYAN STEIL, Wisconsin BILL FOSTER, Illinois
WILLIAM R. TIMMONS, IV, South JOYCE BEATTY, Ohio
Carolina JUAN VARGAS, California
MARLIN STUTZMAN, Indiana JOSH GOTTHEIMER, New Jersey
RALPH NORMAN, South Carolina VICENTE GONZALEZ, Texas
DANIEL MEUSER, Pennsylvania SEAN CASTEN, Illinois
YOUNG KIM, California AYANNA PRESSLEY, Massachusetts
BYRON DONALDS, Florida RASHIDA TLAIB, Michigan
ANDREW R. GARBARINO, New York RITCHIE TORRES, New York
SCOTT FITZGERALD, Wisconsin NIKEMA WILLIAMS, Georgia
MIKE FLOOD, Nebraska BRITTANY PETTERSEN, Colorado
MICHAEL LAWLER, New York CLEO FIELDS, Louisiana
MONICA DE LA CRUZ, Texas JANELLE BYNUM, Oregon
ANDREW OGLES, Tennessee SAM LICCARDO, California
ZACHARY NUNN, Iowa
LISA McCLAIN, Michigan
MARIA SALAZAR, Florida
TROY DOWNING, Montana
MIKE HARIDOPOLOS, Florida
TIM MOORE, North Carolina
Ben Johnson, Staff Director
------
SUBCOMMITTEE ON HOUSING AND INSURANCE
MIKE FLOOD, Nebraska, Chairman
MONICA DE LA CRUZ, Texas, Vice EMANUEL CLEAVER, Missouri, Ranking
Chairwoman Member
JOHN W. ROSE, Tennessee NYDIA M. VELAZQUEZ, New York
WILLIAM R. TIMMONS, IV, South RASHIDA TLAIB, Michigan
Carolina AYANNA PRESSLEY, Massachusetts
RALPH NORMAN, South Carolina RITCHIE TORRES, New York
ANDREW R. GARBARINO, New York SYLVIA R. GARCIA, Texas
SCOTT FITZGERALD, Wisconsin NIKEMA WILLIAMS, Georgia
MICHAEL LAWLER, New York BRITTANY PETTERSEN, Colorado
MARIA SALAZAR, Florida JANELLE BYNUM, Oregon
TROY DOWNING, Montana
C O N T E N T S
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Wednesday, April 22, 2026
OPENING STATEMENTS
Page
Hon. Mike Flood, Chairman of the Subcommittee on Housing and
Insurance, a U.S. Representative from Nebraska................. 1
Hon. Emanuel Cleaver, Ranking Member of the Subcommittee on
Housing and Insurance, a U.S. Representative from Missouri..... 3
STATEMENTS
Hon. French Hill, Chairman of the Committee on Financial
Services, a U.S. Representative from Arkansas.................. 4
Hon. Maxine Waters, Ranking Member of the Committee on Financial
Services, a U.S. Representative from California................ 4
WITNESSES
Mr. Anthony Vidovich, Executive Vice President and General
Counsel, Everest Group......................................... 5
Prepared Statement........................................... 7
Mr. Ben Walker, Executive Managing Director, Aon Reinsurance..... 14
Prepared Statement........................................... 16
Mr. Jerry Theodorou, Director of Finance, Insurance, and Trade
Policy Program, R Street Institute............................. 21
Prepared Statement........................................... 23
Dr. Susan M. Wachter, Albert Sussman Professor of Real Estate,
Professor of Finance, The Wharton School of the University of
Pennsylvania, and co-director of the Penn Institute for Urban
Research....................................................... 30
Prepared Statement........................................... 32
APPENDIX
MATERIALS SUBMITTED FOR THE RECORD
Hon. Mike Flood:
National Association of Realtors............................. 54
SmarterSafer Coalition, dated April 22, 2026................. 56
Arch Mortgage Insurance Company, dated April 22, 2026........ 59
U.S. Mortgage Insurers (USMI)................................ 61
Hon. Troy Downing:
Mr. Jerry Theodorou, ``Why a Federal Reinsurer Remains a Bad
Idea''..................................................... 64
RESPONSES TO QUESTIONS FOR THE RECORD
Written responses to questions for the record from Representative
John W. Rose
Mr. Jerry Theodorou.......................................... 69
Mr. Anthony Vidovich......................................... 71
Mr. Ben Walker............................................... 73
Written responses to questions for the record from Representative
Andrew R. Garbarino
Mr. Jerry Theodorou.......................................... 74
Mr. Ben Walker............................................... 78
Written responses to questions for the record from Representative
Nydia M. Velazquez
Mr. Anthony Vidovich......................................... 79
Mr. Ben Walker............................................... 81
Mr. Jerry Theodorou.......................................... 82
Dr. Susan M. Wachter......................................... 84
DIVERSIFYING RISK: THE BENEFITS
OF REINSURANCE AND CREDIT
RISK TRANSFERS
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Wednesday, April 22, 2026
U.S. House of Representatives,
Subcommittee on Housing and Insurance,
Committee on Financial Services
Washington, DC.
The subcommittee met, pursuant to notice, at 10:01 a.m., in
room 2128, Rayburn House Office Building, Hon. Mike Flood
[chairman of the subcommittee] presiding.
Present: Representatives Flood, Rose, Fitzgerald, Downing,
Hill, Cleaver, Williams of Georgia, Pettersen, Bynum, and
Waters.
Chairman Flood. The Subcommittee on Housing and Insurance
will come to order.
Without objection, the chair is authorized to declare a
recess of the committee at any time and a reminder, we will
have votes sometime in the 11 o'clock hour this morning, and we
will be breaking for that.
This hearing is titled ``Diversifying Risk: The Benefits of
Reinsurance and Credit Risk Transfers.''
Without objection, all members will have 5 legislative days
within which to submit extraneous materials to the chair for
inclusion in the record.
I now recognize myself for 4 minutes for an opening
statement.
OPENING STATEMENT OF HON. MIKE FLOOD, CHAIRMAN OF THE
SUBCOMMITTEE ON HOUSING AND INSURANCE, A U.S. REPRESENTATIVE
FROM NEBRASKA
First of all, I would like to thank all of our witnesses
for being with us today and look forward to an interesting
discussion focused on reinsurance and credit risk transfer.
While distinct in how they are used, both reinsurance and
credit risk transfer, or CRT, are used for a common purpose to
distribute risk that would otherwise be concentrated in one
entity across more market participants. Reinsurance does this
by serving as insurance for insurers.
Let us use an example to help demonstrate when an insurer
might need reinsurance. Let us say a small mutual issuer--which
I have a lot of in Nebraska--issues home insurance policies
primarily in communities in western Nebraska. In most
instances, that business model probably works pretty well but
what if a severe storm moves through the panhandle, pelting
homes across the region with baseball-sized hail and 60-mile-
an-hour straight line winds? That insurer could see a large
portion of its insureds file claims at the same time, a
disaster that could even send the company into bankruptcy.
One way for an insurer to deal with this is to get
reinsurance, or insurance for the insurer, that would cover
exactly the type of risk that would put them in a difficult
position to pay for claims. By purchasing reinsurance, the
insurer covers themselves from a worst-case scenario, much like
a homeowner uses insurance to cover themselves in the event of
an extreme weather event that causes massive damage to their
home.
Similarly, CRT is used by Fannie Mae and Freddie Mac to
distribute mortgage credit risk off of the enterprises' books.
Much like reinsurance, CRT, if used properly, will help
redistribute some of the risks on the government-sponsored
enterprises' (GSEs') books to other financial actors, lessening
the burden on the enterprises themselves.
For those of us that are interested in lessening the
taxpayers' potential liability from Fannie Mae and Freddie Mac,
CRT is a tool that could help meet that goal. CRT is designed
to put private capital ahead of the taxpayer in the case of
mortgage defaults. When it operates properly, it both spreads
the risk and lessens taxpayer exposure to downturns in the
mortgage market.
While this discussion will largely focus on transferring
risk between insurers or the enterprises, both reinsurance and
CRT have downstream effects on the insurance market and the
mortgage market, including consumers. A market with
concentrated risks is going to be more likely to have problems
when unusual events arrive.
As a policyholder, you want your insurer to have
diversified risk to ensure that, when something happens to you,
they pay your claim. As a prospective home buyer, when you are
shopping for a mortgage, you want the best terms and the lowest
interest rate possible, something that is easier to find when
enterprises are healthy and conforming mortgage market is
running smoothly.
The bottom line: Reinsurance and CRT help distribute risk
across the market. Both make our insurance market and mortgage
market operate safely and soundly.
I would like to add the following document into the record
for this hearing, an April 21, 2026, letter from the National
Association of Realtors.
Without objection, it is received.
[The information referred to can be found in the appendix
on page 54.]
Chairman Flood. I look forward to hearing from our expert
panelists today. I understand this is the first time in almost
20 years that we have had this in front of our committee. I am
shocked that the paparazzi is not here checking in on what we
are doing, but we are working on behalf of the taxpayers to
make sure that the capital markets step in before they do in
the event of a catastrophe.
With that, I now recognize the ranking member of the
subcommittee, Mr. Cleaver, for 4 minutes for his opening
statement.
OPENING STATEMENT OF HON. EMANUEL CLEAVER, RANKING MEMBER OF
THE SUBCOMMITTEE ON HOUSING AND INSURANCE, A U.S.
REPRESENTATIVE FROM MISSOURI
Mr. Cleaver. Thank you, Mr. Chairman. I appreciate you
calling this meeting together. I say ``meeting''; it is more
informational than it is going to be based on conflict and so
forth. So, thank you very much. I think this is helpful.
I would like to thank our witnesses for being here with us.
Risk transfer mechanisms, including reinsurance and credit
risk transfers, CRT, are core tools used by primary insurers
and government-backed entities to manage risk. Reinsurance is
often referred to as insurance for the insurance companies.
Primary insurers purchase reinsurance to cede concentrated
exposures they prefer not to retain or must transfer to satisfy
regulatory and capital requirements. Credit risk transfers are
a type of reinsurance used by the enterprises to offload
mortgages, mortgage credit risk, to the private sector in
exchange for a premium payment.
Following the financial crisis, the Federal Housing
Financial Agency, Federal Housing Finance Agency (FHFA), wisely
directed Fannie Mae and Freddie Mac, GSEs, to reduce taxpayer
exposure by transferring mortgage credit risk to private
capital. These tools deliver multiple benefits, including
taxpayer protection, distribution of systemic risk, increased
capacity, and the provision of price signals. Most of the
Federal insurance programs, including the Terrorism Risk
Insurance Program, and the National Flood Insurance Program
shift the risk from the private sector to the Federal
Government. By contrast, credit risk transfers, CRT, and the
National Flood Insurance Program (NFIP) use of reinsurance
shift risk from the government to the private sector.
I appreciate our witnesses, who will speak in detail about
the mechanisms and benefits of these tools. It is important to
know that reinsurance and CRT are not the only ways to manage
or distribute risk. Alternatives include diversification,
capital buffers, and hedging.
However, they are widely recognized as critical components
of the risk-management toolkit. At the same time, they are most
effective when paired with strong management of underlying
risk.
Since assuming his role as Director, Mr. Pulte, Director of
the Federal Housing Finance Agency, has taken a series of
unprecedented actions, including appointing himself chair of
both enterprises, removing the CEO of Freddie Mac, dismissing
more than a dozen board members across the enterprises,
dissolving the audit committee of Fannie Mae, and targeting
officials appointed during the Biden-Harris Administration,
including Lisa Cook. These developments have raised the
legitimate questions about the direction of U.S. housing
finance policy and the future of the enterprises and the
secondary mortgage--market mortgage.
American families have also faced sharply rising property
insurance premiums since 2021, driven in part by the increasing
frequency and severity of climate-related disasters. Addressing
these pressures will require a greater focus on risk reduction,
including mitigation, resilience, and climate adaptation to
reduce underlying risk and overtime cost.
The U.S. Government Accountability Office has emphasized
the importance of strengthening the delivery of Federal
disaster insurance assistance, including the National Flood
Insurance Program, as disasters grow more frequent and severe.
I look forward to hearing from our witnesses about this
important reinsurance and CRT. We apologize for the crowded
room. Thank you, Mr. Chairman.
Chairman Flood. The gentleman yields back.
I know recognize the chairman of the full committee, Mr.
Hill, for 1 minute for an opening statement.
STATEMENT OF HON. FRENCH HILL, CHAIRMAN OF THE COMMITTEE ON
FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM ARKANSAS
Chairman Hill. I thank the chairman and I know Cleaver and
Flood always attract a big paparazzi gathering, and I am always
taking pictures of both of us.
We appreciate this panel. I think it is very important for
our members to connect and think through the benefits of the
use of reinsurance both in all of our Federal risk categories,
like the National Flood Program, like, obviously, offloading
the risk in our government-sponsored enterprise mortgage
portfolios but how that is done is really important, and is the
risk really laid off the taxpayers and is it the right--a layer
of risk? So, this hearing is very important.
I am grateful for a team of Flood and Cleaver in holding
this hearing. I really look forward to the discussion, and I
yield back.
Chairman Flood. The chairman yields back.
I now recognize the ranking member of the full committee,
Ms. Waters, for 1 minute for an opening statement.
OPENING STATEMENT OF HON. MAXINE WATERS, RANKING MEMBER OF THE
COMMITTEE ON FINANCIAL SERVICES, A U.S. REPRESENTATIVE FROM
ARKANSAS
Ms. Waters. Mr. Chair, credit risk transfers, or CRTs can
offer benefits to our housing finance system. They can provide
insight about market perceptions of the default risk of the
housing portfolios of Fannie Mae and Freddie Mac and may allow
private capital to help absorb losses but, to be clear, CRTs
will never replace the role of the Federal Government in
housing finance. In order to address the affordable housing
crisis, Congress must ensure that Fannie and Freddie meet their
mission to provide liquidity, sustainability, and affordability
for all housing markets in the United States and at all times.
That is why this committee should consider every tool available
to increase access to affordable housing, including ways to
leverage CRTs and other forms of reinsurance when it makes good
sense. I yield back.
Chairman Flood. The gentlelady yields back.
Today, we welcome the testimony of Mr. Anthony Vidovich,
the executive vice president and general counsel of Everest
Group; Mr. Ben Walker, an executive managing director at Aon;
Mr. Jerry Theodorou, the director of the Finance, Insurance,
and Trade Policy Program at the R Street Institute; Dr. Susan
Wachter, the Albert Sussman professor of real estate and
professor of finance at the Wharton School of the University of
Pennsylvania and the codirector of the Penn Institute for Urban
Research.
We thank each of you for taking the time to be here. Each
of you will be recognized for 5 minutes to give an oral
presentation of your testimony.
Without objection, your written statements will be made
part of the record.
It looks like all of you have your microphones
appropriately close to your mouth, but it does help if you
speak right into them so that we can properly get it
transcribed and that we can hear you.
Mr. Vidovich, you now recognized for 5 minutes for your
opening oral remarks.
STATEMENT OF ANTHONY VIDOVICH, EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL, EVEREST GROUP
Mr. Vidovich. Chairman Flood, Ranking Member Cleaver, and
members of the subcommittee, thank you for the opportunity to
testify today. The Reinsurance Association of America (RAA)
also thanks Chairman Flood for his leadership in advocating for
National Weather Service and the Federal science,
infrastructure, personnel, and data that make forecasting and
the assessment of natural hazard risk possible. Federal science
is foundational to an insuring system that makes it possible to
build and buy homes, finance businesses, and sustain jobs
across our country, while helping families and communities
recover and rebuild after disaster strikes.
I am Anthony Vidovich of Everest Group, testifying on
behalf of the Reinsurance Association of America.
Reinsurance, as the subcommittee has noted, is simply
insurance for insurance companies. It is a cost-effective,
risk-management tool used to share risk, limit liability,
stabilize loss experience, protect against catastrophes, and to
increase capacity.
It is not mandated. Insurers and government programs choose
reinsurance because it is often a more cost-effective way to
manage catastrophic risk and access additional capital at a
lower cost than other forms of capital.
The global capital of reinsurance matters. For example,
reinsurers paid roughly 28 percent of the more than $90 billion
in insured losses from Hurricanes Katrina, Rita, and Wilma, and
more than half of the insured losses from the September 11th
attacks and reinsurers remained open for business throughout
the coronavirus disease 2019 (COVID-19) pandemic. For the
Federal Government, reinsurance reduces taxpayer risk, shifting
risk to private markets, lowering exposure, and providing a
market-based signal of the true cost of that risk, and
supporting the availability of credit, as noted by the
coordination of benefits (COB). Several Federal programs within
this committee's jurisdiction are successfully using this risk
management tool.
In 2013, the Federal Housing Finance Agency established a
Credit Risk Transfer Program, which transferred more than $230
billion of credit risk on over $8 trillion of mortgage balances
with over 30 percent of the risk transfer shared by 70
reinsurers.
Federal Emergency Management Agency's (FEMA's) National
Flood Insurance Program has transferred approximately $18
billion in risk since 2017, around $9 billion of which was
assumed by 48 traditional reinsurers, who paid FEMA over a
billion dollars in the program's first year after Hurricane
Harvey losses.
In 2018, the Export-Import Bank of the United States
launched a pilot reinsurance program with 10 reinsurers
providing approximately $1 billion in loss coverage in its
first aircraft financing transaction, supporting U.S. exports
and jobs.
There is an opportunity to build on these successes by
revising U.S. bank capital rules that do not clearly permit the
use of insurance and reinsurance for capital relief. Allowing
banks to use reinsurance would help them better manage risk and
support access to credit while maintaining strong regulatory
oversight and enhancing the safety and soundness of the banking
system.
Reinsurance is already working across the U.S. insurance
industry and Federal programs that help people buy homes and
finance rental housing, protect homes and businesses from
flooding and support U.S. exports and jobs. The opportunity
today is to build on that success and make full use of a
proven, cost-effective tool to better manage risk, expand
access to credit, protect taxpayers, support economic growth,
and strengthen the safety and soundness of our financial system
and Federal programs.
Thank you for the honor of testifying today, and I look
forward to your questions.
[The prepared statement of Mr. Vidovich follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Flood. Thank you very much.
Mr. Walker, you are now recognized for 5 minutes for your
oral remarks.
STATEMENT OF BEN WALKER, EXECUTIVE MANAGING DIRECTOR, AON
REINSURANCE
Mr. Walker. Chairman Flood, Ranking Member Cleaver, members
of the subcommittee, thank you for the opportunity to appear in
front of you today. My name is Ben Walker. I am an executive
managing director at Aon Re, where I lead our Global Credit
Team. Aon works with major U.S. Government programs and
government-sponsored enterprises, including Fannie Mae, Freddie
Mac, the Export-Import Bank, FEMA's National Flood Insurance
Program, and the U.S. International Development Finance
Corporation.
Credit risk transfer, or CRT, is a proven, scalable way to
mitigate risk to the Federal balance sheet. It shares risk with
private capital, protects taxpayers, and preserves access to
credit through challenging economic cycles.
In my brief time with you today, I would like to answer the
three questions: What is CRT? How does CRT work and why does
CRT matter? First, what is CRT? Traditional reinsurance is used
to transfer the cost of physical events, such as storms,
floods, or wildfires, to private markets. FEMA's NFIP
Reinsurance Program, which had reinsurance recoveries after
Hurricane Harvey, is one example of risk transfer. Credit risk
transfer works similarly but is applied to credit risk, which
is the risk if borrowers do not repay their loans.
Export-Import's (EX-IM's) $1 billion credit reinsurance
program on aircraft loans implemented at Congress' direction
and funded from existing budget is another example of how a
Federal agency can share risk with the private sector.
Second, how does CRT work? After the financial crisis and
while in conservatorship, Fannie Mae and Freddie Mac were
directed to develop ways to better protect taxpayers through
credit risk transfer. Typically, GSE CRT will cover a defined
pool of mortgages and transfer a specific layer of potential
losses above an attachment point and up to a detachment point.
In exchange for loss protection, the GSEs pay insurance
premium. The design was intentional. It was aimed to cover
losses on the scale of the great financial crisis. The idea was
that, if we ever see that level of stress again, a substantial
portion of losses would be paid by private investors rather
than taxpayers.
Since inception, nearly 70 reinsurance balance sheets have
written close to $75 billion of CRT limit. Reinsurance adds
value by providing more stable pricing across cycles and by
offering forward coverage, which locks in protection before
loans are originated, rather than 6 to 12 months afterwards.
Third, why does CRT matter? Credit risk transfer is
important for four key reasons: It strengthens taxpayer
protection by shifting a clearly defined amount of laws from
Federal entities to private capital. It supports system
stability by diversifying trillions of dollars of mortgages and
other credit exposure off Federal balance sheet and in the
global markets. It enhances market discipline, because
independent underwriting and pricing by reinsurers and
investors will provide a continuous check on risk management,
which is complementary to regulatory efforts and it delivers
capital efficiency, as CRT has often been cheaper than raising
equivalent equity. This provides an overall lower cost of
capital and supports stable or potentially even lower cost for
borrowers.
Program design choices, such as where to set attachment
points or policy levers. They determine how many protection CRT
provides in a stress scenario and how much cost is born in
advance rather than during or after a crisis. From what we see
in the market, there is significant private sector capacity to
do more and to do it in a way that meaningfully protects
taxpayers, if so desired.
I will close by making the point that CRT is not
theoretical, and it is not partisan. It is a practical tested
mechanism that has already been used at the GSEs, at NFIP, and
at EX-IM.
Whatever choice Congress ultimately makes about the long-
term structure of housing finance and Federal credit programs,
CRT will be available as one of the most effective ways to
reduce taxpayer exposure, improve the safety and soundness of
the system, and leverage private expertise and capital in
support of public objectives. Thank you, and I look forward to
your questions.
[The prepared statement of Mr. Walker follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Flood. Thank you for your testimony.
Mr. Jerry Theodorou, the director of finance, insurance,
and trade policy at the R Street Institute, you are recognized
for your oral remarks for 5 minutes.
STATEMENT OF JERRY THEODOROU, DIRECTOR OF THE FINANCE,
INSURANCE, AND TRADE POLICY PROGRAM, R STREET INSTITUTE
Mr. Theodorou. Chairman Flood, Ranking Member Cleaver,
members of the subcommittee, thank you for holding this hearing
and for the invitation to testify. My goal is to present an
overview of the complex global reinsurance industry. Reinsurers
are dispersed across the globe with reinsurance hubs in five
geographic clusters--in Continental Europe, Bermuda, the
Lloyd's Market, the U.S., and the Far East. Close to half of
global reinsurance capital is in Continental Europe. The big
four continental reinsurers--Munich Re, Swiss Re, Hannover Re,
SCOR--account for half of the world's reinsurance market. If
the primary insurance industry is effectively the economy's
financial first responder, the reinsurance industry is the
market's shock absorber. Several features of the reinsurance
market are responsible for its role in the economy. Reinsurance
diversifies risk.
A strong illustration of this is reinsurers' reaction to
the hurricane seasons of 2004 and 2005. In 2004, four
catastrophic hurricanes struck Florida--Charlie, Frances, Ivan,
and Jeanne. In 2005, Katrina, Rita, and Wilma hit the Gulf in
Florida.
Cumulative losses from the seven hurricanes reached about a
hundred billion dollars but more than half the losses were
borne by overseas reinsurers. Were it not for insurers
recovering the majority of 2004 to 2005 losses from global
reinsurers, primary insurers would have shouldered the entirety
of the $100 billion loss.
The global reinsurance industry paid 61 percent of the
losses from the 2005 hurricane season and 60 percent of the
losses from 9/11 were assumed by the global reinsurance
industry. You see, global reinsurers take the financial sting
out of disasters.
The losses of 2004 and 2005 were significant for another
reason. Responding to a depletion of capital from those two bad
years, entrepreneurial insurance executives created eight new
Bermuda reinsurance companies, focusing on property catastrophe
risk. This spawn of 2004 to 2005 is called the Class of 2005.
Insurance companies have counterparty relationships with
dozens of reinsurers. Medium-sized insurance companies
typically obtain reinsurance from about 75 reinsurers, enabling
the spread of risk. Reinsurers perform other functions beyond
diversification, including volatility management, retro
session, which is reinsurance for reinsurers, and serving as a
flexible source of capital.
After years of rate increases, reinsurers are now reducing
rates as a response to below-average catastrophes in 2025 and
in the first quarter of this year. Just a few weeks ago, on
April the 1, property catastrophe rates came down by about 14
percent. Lower reinsurance costs mean more competition and
lower prices.
Reinsurers take on more than just property catastrophe
risk. They reinsure liability, cyber, and mortgage insurance
portfolios, and they engage in credit risk transfer. This is a
financial mechanism enabling government entities that hold
credit risk to offload default risk through reinsurers.
Government-sponsored enterprises, the GSE, such as Fannie
Mae and Freddie Mac, shift borrower default risk to reinsurers.
Numerous reinsurers say it serves as CRT counterparties. These
include the European big four, Bermuda, and Lloyd's.
Reinsurer responses to the largest disaster toll of 2004
and 2005 showed that it was not government action that paved
the way out for a capital-deprived industry; it was private
investors who recognized uncorrelated insurance risk as a
diversifying asset strategy.
Over the years, there have been proposals introduced in
Congress to create Federal reinsurance entities offering
reinsurance products at below market rates. Such initiatives
are ill-advised for three reasons: First, government-provided
reinsurance would displace private market reinsurance; second,
underpriced government reinsurance would undermine incentives
for mitigating risk by suppressing transmission of price
signals; third, enterprise government reinsurance means
policyholders with low risk subsidize those with elevated risk.
Thank you for holding this hearing and for consideration of
my views. I look forward to your questions.
[The prepared statement of Mr. Theodorou follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Flood. Thank you very much.
Dr. Wachter, you are now recognized for 5 minutes for your
oral remarks.
STATEMENT OF SUSAN M. WACHTER, ALBERT SUSSMAN PROFESSOR OF REAL
ESTATE, PROFESSOR OF FINANCE, THE WHARTON SCHOOL OF THE
UNIVERSITY OF PENNSYLVANIA, AND CO-DIRECTOR OF THE PENN
INSTITUTE FOR URBAN RESEARCH
Ms. Wachter. Chairman Hill, Ranking Member Cleaver, and
members of the subcommittee, thank you for the opportunity to
testify at today's hearing. I am Susan Wachter, professor of
real estate and professor of finance at the Wharton School at
the University of Pennsylvania.
Since their introduction in 2012, CRTs have become a
cornerstone of post-crisis housing finance. At their core, CRTs
are instruments that allow government-sponsored enterprises to
transfer a portion of mortgage credit risk from their balance
sheets to private investors. CRTs trade and price and identify
credit risk. Rather than concentrating risk within the GSEs and
exposing taxpayers, CRTs 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 transferred hundreds
of billions of dollars in mortgage credit risk to the private
sector. This growth has not only reduced taxpayer exposure, but
it 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 tradeable 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 2008 financial crisis, risk can
build, unchecked. CRTs help prevent the catastrophic outcome 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 privatization of the GSEs is
contemplated. A recent convening by the Penn Institute for
Urban Research, which I codirect, 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, preserving the affordably
public mission of the GSEs; and, second, insuring 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 homeownership. Thank you. I
look forward to your questions.
[The prepared statement of Ms. Wachter follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman Flood. Thank you for your testimony.
We will now turn to member questions. I now recognize
myself for 5 minutes for questioning.
Mr. 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?
Mr. Vidovich. Thank you for the question. The reinsurance
industry is quite vibrant. Capital is continuing to enter that
market and rates for catastrophe reinsurance in a number of
cat-prone areas are declining because we are seeing increased
competition because of that inflow of capital.
For example, in Florida, which we have heard from Mr.
Theodorou and in my own remarks, has a history of being prone
to a number of cat-risks, including hurricanes. We are seeing
significant new capital come into that market, which is driving
down the cost of cat reinsurance premiums. We are also seeing
new entrants come into that market to assume that risk. So, the
private market is responding and is quite vibrant.
Chairman Flood. Continuing with you, sir, how could
catastrophe bonds fit into the broader risk-sharing ecosystem
as we look forward? 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
and market.
Mr. Vidovich. Of course. A catastrophe bond is bond 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 is used as
collateral to ensure that the losses are paid, and those bond
holders get an interest payment or a coupon based on the
investment income that those assets earn but also based on the
premium paid by the ceding insurer for that type of
reinsurance.
Chairman Flood. Just to clarify, there is room for both
catastrophe bonds and reinsurances in our market?
Mr. Vidovich. Actually, catastrophe bonds are simply a form
of reinsurance. So ``reinsurance'' is an umbrella term. so, the
answer to your question is absolutely there is room for both.
With a type of tool----
Chairman Flood. I appreciate that. Let us pivot to CRT only
because I am limited on time. Mr. Walker, as it relates to
credit risk transfer, what types of investors are most
interested in CRT, and what typically drives that interest?
Mr. Walker. Thank you for the question. I can speak to the
reinsurance marketplace for CRT, which is comprised of U.S.
insurance companies, Bermudian insurance companies, Lloyd's of
London entities, as well as Continental European reinsurers.
It is a diverse, global financial system supporting U.S.
CRT. The draw is that it is a diversifying risk. There is a
significant amount of data available to price and analyze the
risk and so insurers are eager to continue to diversify their
balance sheets and evaluate the risk that is highly data-rich.
Chairman Flood. Can you, Mr. Walker, speak to how the
enterprises have been using CRT since the latest iteration of
the capital rule back in 2020? Then, also, do you anticipate
any changes to attachment points for CRT in the future?
Mr. Walker. I mean, the GSEs have more or less continuously
used CRTs since its inception in 2013. When the enterprise
regulatory capital framework was released in 2020, finalized in
2021, we did see some change in the GSE attachment points and
detachment points driven by dynamic aspects of that capital
framework. It is 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.
Chairman Flood. All right. I want to switch briefly to the
National Flood Insurance Program, or NFIP. This is for Mr.
Vidovich and Mr. Walker. Can you speak very briefly--I only
have 50 seconds--to how the NFIP uses reinsurance; what kinds
of reinsurance does it use; and what risk does it usually use
it on?
Mr. Vidovich. So, briefly, it uses a number of different
types of reinsurance but including traditional treaty
reinsurance, which transfers the risk of flood losses to the
private market.
Chairman Flood. Mr. Walker.
Mr. Walker. Yes, I do not have anything to add other than
traditional reinsurance, and catastrophe bonds are both part of
their program.
Chairman Flood. I will just add that I think it is
imperative that the NFIP be buying reinsurance for its
policyholders and for the taxpayers.
With that, I yield back. It is my pleasure to introduce the
ranking member of the Subcommittee on Housing and Insurance,
Mr. Cleaver, you are recognized.
Mr. Cleaver. Thank you, Mr. Chairman.
The FHFA attachment points, since 2022, 2023, the
enterprises have shifted toward higher attachment points for a
CRT. Some have even argued that this leaves more risk with
taxpayers that private capital should absorb and has an impact
on CRT's market discipline function.
Mr. Walker, you talked about this in your testimony today.
Finding attachment points that balance risk transfer and cost
capital would move the program closer to its original intent.
What, in your opinion, should this balance look like?
Mr. Walker. Thank you for the question. As I mentioned in
my statement, that is a policy question but, at the end of the
day, what we are trying to do is figure out how to kind of be
effective in the capital relief that the GSEs are getting and
balancing the risk that is being transferred and shared 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 and the CRT programs that
they are currently buying.
Prior to 2020 and the enterprise regulatory capital
framework, those were much closer to the risk sharing, a lot
more risk with the private sector.
Mr. Cleaver. Thank you. That is helpful. I want to move
over into conservatorship. Facilitating a robust and
competitive CRT market improves profitability and the value of
taxpayer investments in the enterprises. One of the vital
reforms for future success in whatever form the GSEs may take
is entrenching and codifying the CRT and reinsurance programs.
Ms. Wachter, thank you so much for being here every time we
send out the signal. Thank you very much. You have testified in
the past about what works and what considerations for future
GSE reform should be scrutinized. What should we, what should
this committee keep in mind during these discussions? What are
the important things you would like for us to address?
Ms. Wachter. Thank you so much for the question. I think
there are two major points that we can take from our experience
with CRTs and the tremendous amount of work that has gone into
developing and implementing the CRT market on the part of the
GSEs and private sector participants and those two are the
following: First, the CRT market works to offload risk. In any
privatization plan and 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 GSEs, whether they are privatized or not, to
public identification and potential response.
Second, using the CRT market to continuously price risk is
appropriate, for information purposes, but it would be
procyclical and potentially destabilizing if privatized
entities, the GSEs 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 of how the GSEs
are to be privatized. How will G fees be determined? G fees are
the public-facing, public charge--charged to mortgage holders
with risk. If that G fee were to be driven by CRT pricing, it
could be potentially very destabilizing to the system. The
research that we have seen and the experience we have seen
underlies that.
So, those are the two principles that I would argue for in
terms of contemplation of privatization.
Mr. Cleaver. Thank you. Thank you very much.
Thanks, Mr. Chairman.
Chairman Flood. The gentleman yields back.
The gentleman from Wisconsin, Mr. Fitzgerald, is now
recognized for 5 minutes.
Mr. Fitzgerald. Thank you, Chairman. Mr. Walker, so private
mortgage insurance helps first-time and, I would say, working-
class buyers access homeownership, and it safeguards taxpayers
from credit risk. It is kind of the original form of credit
risk transfer, I guess, you could describe it as.
The industry has grown more resilience through consistent
mortgage insurance CRT transactions, which has been, I guess,
ensuring support for new buyers and claim payments during all
kinds of economic turmoil.
Can you discuss how mortgage insurers use CRT to manage
risk? How has it made the housing market stronger and then that
would also include forward transactions covering any of the
future business and how it has supported efforts to diversify
the industry's capital base?
Mr. Walker. Thank you. That is a great question. I would
agree with your statement that private mortgage insurance is an
original form of credit risk transfer, which is an important
note.
The mortgage insurers have actually gained the same
benefits that we have been discussing here today from credit
risk transfer that the GSEs do. Most importantly, you have
heard all the panel members here talk a lot about
diversification. It is effectively taking what is largely
monoline mortgage risk and a private mortgage insurer and
sharing it and spreading it out with a bunch of private
entities either in bond form or in reinsurance form.
So the mortgage insurance company has really leaned into
credit risk transfer. They have been consistently purchasing it
since 2012 or 2013, and they use it to transfer both risk and
get favorable capital relief from those transactions.
In the last couple of years, they have really leaned into
forward reinsurance protection, which provides them with
coverage on loans that they will insure in the future. That is
very helpful to them because it gives them clarity and
certainty as to the amounts 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.
Mr. Fitzgerald. Very good. Thank you.
Dr. Wachter, I believe the credit risk transfer can play a
role in continuing to ensure Fannie and Freddie are
significantly less risky than before the financial crisis but I
think there is a concern about CRT that it has been an
underused tool by them for, in recent years, I guess you can
say.
So what are your thoughts on CRT using Fannie and Freddie,
particularly regarding concerns on the ability for CRT to be
countercyclical and prepayment risk eroding coverage? It could
be, I guess, characterized as undercollateralized counterpart
counterparty risk. I know it is kind of--that question is kind
of all over the place. If you can try to respond to that.
Ms. Wachter. Thank you so much for the question. The use of
CRT can evolve over time. It already has. It has become more
sophisticated and can evolve further but the use of security
CRT, which I will--based on a response to your question on--
definitely it depends on the capital rule. Many economists--the
consensus from many economists is that the capital rule is too
stringent and may actually be undermining of future
profitability. If so, with--and I just think capital is very
important. Obviously, Congress agrees on that. It is not a CRT.
It is not a substitute for capital at all but, if the capital
rules were less stringent, there would be more of a role for
CRT. I see that as a likely happening going forward.
Mr. Fitzgerald. Very good.
Mr. Vidovich, do you believe that Fannie Mae and Freddie
Mac's regulatory capital rules are sufficiently aligned with
the actual credit risk characteristics of the underlying
mortgages, such as loan-to-value ratios, borrower credit
scores, debt-to-income ratios, and product structure?
Mr. Vidovich. Thank you for the question. You know, in our
view at the RAA--I am in the reinsurance industry. We think the
GSEs have effectively used CRT to address and align interest
along the lines that you have described but, as Mr. Walker has
stated in answers to his questions and testimony, we think
there is additional opportunity to leverage the private
markets----
Chairman Flood. Sorry to interrupt you.
Mr. Vidovich [continuing]. to further reduce taxpayer
exclusion----
Chairman Flood. The gentleman's time has expired.
Thank you. The gentleman yields back. The ranking member of
the Financial Services Committee, the gentlelady from
California, Ms. Waters, is now recognized for 5 minutes.
Ms. Waters. Dr. Wachter, the Trump-appointed FHFA Director
Bill Pulte has taken unprecedented action that calls the
government of Federal Housing Administration (FHA) and the GSEs
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 affordable housing crisis, Pulte
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 GSEs on how best to identify and assess
climate risk and has offered unserious housing proposals, like
the 50-year mortgage, which would lock homeowners into mortgage
debt for the rest of their lives.
Dr. Wachter, are the tools available to Congress that we
should consider so that we can respond and mitigate the kinds
of governance risk posed by the Director to our housing finance
market?
Ms. Wachter. 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 even more strongly
than the case for most Americans. If you do not own a house
today and you are young, this is a crisis.
I do believe that there are tools that are available, and I
do believe that these tools can be used more than they are
right now. So, I thank you for the question.
Ms. Waters. Dr. Wachter, 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 are being evaluated?
Ms. Wachter. Chairman--Congresswoman Waters, this is not an
area in which I specialize. However, there is 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.
Ms. Waters. Well, could there be staggered approaches taken
to test this type of approach? For instance, where pilot bounds
are initially held small and GSEs held the higher portion of
the risk, do you see this as an effective use of CRTs?
Ms. Wachter. Again, this is a very important issue and one
which I am grateful to have David Brickman's expertise, and I
think it needs to be considered.
Ms. Waters. But effective?
Ms. Wachter. Well, I cannot speak to the intricacies
because I have not set it in as yet. Thank you.
Ms. Waters. Well, I thank you. If you believe there are
things that we could do, we could be using----
Ms. Wachter. Well, absolutely, there are.
Ms. Waters. We could be using some of the rules that we
have available to us. Then I would like to talk with you a
little bit more, and we can begin to identify what those are so
that we can utilize them because this is an important time for
us to address these issues.
Ms. Wachter. I appreciate that. Thank you.
Ms. Waters. Okay. Thank you for being here. I appreciate
your assistance, and I yield back.
Chairman Flood. The gentlelady yields back. The chairman of
the full Financial Services Committee, the gentleman from
Arkansas, Mr. Hill, is now recognized for 5 minutes.
Chairman Hill. Thank you, Chairman. Again, thanks to our
witnesses. I appreciate you helping us work through the issues
surrounding the use of reinsurance. So much of this is
offsetting loss for the taxpayers. At the end of the day, when
the losses come due, you are trying to figure out who is left
to make those major payments.
Risk transfer tools, as we have established today, and
reinsurance, credit risk transfer, all help answer that
question on who picks up those losses by bringing private
capital in before losses fall on the backs of taxpayers. I
thought I might focus on how the tools work actually in
practice and start with you, Mr. Walker.
Credit risk transfer was designed to move mortgage risk off
the GSEs' balance sheets and bring in private capital, but the
real question is not whether the risk is transferred, but what
layer of risk is actually transferred? I referenced this in my
opening comments and, if the CRT buyers get the easy part, then
that gives a modest benefit--but I am interested in the
structure.
As CRT structures have evolved, they have shifted toward
higher attachment points that leave GSEs retaining more
expected losses while transferring only the more remote tail
end of the risk. Is that true?
Mr. Walker, is that true?
Mr. Walker. Yes, thank you for the question. It is true
that the attachment points on GSE CRT programs have increased
in the last couple of years but, recently, we are actually
seeing a trend where they are starting to come down a little
bit. It is something we are currently evaluating and constantly
looking at.
Chairman Hill. What would be the reason for that? Would it
be that the perception is that the CRT--the Fannie and Freddie
underwriting is weakened and therefore that reinsurance is less
likely to take a broader selection of the losses or what
accounted for that attachment point issue?
Mr. Walker. 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. The consequent slight decrease in
attachment points has been part of the constant evaluation of
market pricing, risk transfer, and capital relief.
Chairman Hill. How should we balance that tradeoff when we
ask questions about it or think about it? How do you think we
should be--as we review the potential release of Fannie Mae and
Freddie Mac from conservatorship, how should members think
about that?
Mr. Walker. I agree with Dr. 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.
Chairman Hill. Let me turn to you, Mr. Theodorou. We have
heard for a new--when I travel around the country, I will
occasionally go to an insurance brokerage type meeting, and
there is no risk that they would not like to see transferred to
the Federal Government in some of those meetings. So, there is
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 taxpayers and create a new pathway for the government
to take it instead of creating new ways for the government to
increase its exposure.
When there are major losses hit, should the answer not be
more private capital, not less? What do you think, Mr.
Theodorou?
Mr. Theodorou. Well, now, there is more capital. As we have
heard, the catastrophe bond market, insurance-linked
securities, is very vibrant. Last year was the strongest year
on record for issuance of catastrophe bonds. You have other
risks that are also being the subject of catastrophe bonds, as
the industry matures, including wildfire and cyber and
liability risks, which were sort of off limits because of the
long duration of the claim.
So you have got more private capital that is coming in.
There is more interest in the reinsurance and insurance
industry. When we spoke about Florida before, new capital was
coming in, and also another indicator of the health of the
market is look at--what does Wall Street say? The biggest
Florida insurance company is Universal. A year ago, it was
trading at $16 a share. Yesterday, closing about 34: more than
double.
So Wall Street analysts like insurance. They think that
insurance companies and reinsurance companies are doing a good
job with their calculations of probable and maximum loss and
maximum possible loss. It is much more sophisticated industry
than it has been for the last 25 or 30 years. Yes, more private
capital coming in.
Chairman Hill. Very good. Well, thank you for that.
Mr. Flood, thank you for this hearing. I yield back.
Chairman Flood. The gentleman yields back.
The gentlewoman from Colorado, Ms. Pettersen, is now
recognized for 5 minutes.
Ms. Pettersen. Thank you, Mr. Chairman, and thank you all
for being here today for such an important discussion. You
know, the national state of housing is dire. Nationally, home
prices have surged nearly 50 percent, and rent is up nearly 25
percent in just the last 5 years alone. On top of this, we are
seeing a drastic increase in insurance prices, which is making
it just untenable for families, especially in Colorado, as we
have contributing factors of hail damage that are the number
one reason for increase in costs but also wildfire risk.
Mr. Walker, given the risk from extreme weather that is
growing and compounding, such as droughts contributing to
extreme fire risk and landslides following flooding and
wildfires, how are current and future climate risk assessed by
the reinsurance and credit risk transfer markets?
Mr. Walker. Thank you for your question. I will answer that
question from a credit risk transfer perspective and as not a
property expert. Property risk does come into play with credit
risk transfer. Those protections are in place regardless of the
reason a borrower defaults. So, if there is natural catastrophe
and a default happens because of it, credit risk transfer is
there to kind of cover those claims.
So reinsurers do evaluate their credit risk transfer
exposure from a natural catastrophe perspective, and the
current reality is there is 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.
Ms. Pettersen. Dr, Wachter, while the severity and
frequency of high-loss events continue to increase,
unfortunately, the FH--the FH--the FHFA, oh, my goodness, sorry
about that, has taken multiple actions to undermine climate
risk transparency, including revoking climate risk management
requirements for government-sponsored enterprises, and
withdrawing from the Network of Central Banks and 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
home buyers?
Ms. Wachter. Thank you for the question. If I may, with co-
authors, we have a recent paper that was published just in 2025
on climate risk in mortgage markets. I would like to point to
the work there, which shows that CRTs do indeed price the risk
that comes from climate events and so that is very useful for
that purpose as well.
I am aware that FHFA has pulled back its climate research.
I do think more data on climate risk is absolutely critical and
the mortgage market is particularly important work. I would
hope to see more research going forward.
Ms. Pettersen. Thank you. Another follow-up question, Dr.
Wachter. As communities are becoming increasingly at risk for
devastating losses, they are also facing uncertainty as
insurance companies are completely pulling coverage out from
communities.
When I meet with some small businessowners just outside of
the suburbs, even in Evergreen, Colorado, they are unable to
ensure their businesses and homeowners who are unavailable to
find insurance options are fleeing these communities because of
the inability to find any options. What happens to the
communities that do not have anywhere to turn for insurance
options?
Ms. Wachter. This is obviously an incredibly important
problem, particularly for States that are exposed to risk,
including Florida, California for wildfires, and there is
ongoing work, but there needs to be much more. Particularly
what I would like to see is more cooperative work among the
reinsurers, insurers, and communities, particularly the
communities that are in harm's way, to increase the
availability of insurance.
Ms. Pettersen. That leads me to--well, another piece of
this, which--what role does AI play in modeling risk and
managing reinsurance portfolios, clarifying risk mitigation,
and processing claims, and what measures are being taken to
ensure that consumer interests and data are being adequately
protected? You have 4 seconds.
Ms. Wachter. Not enough.
Ms. Pettersen. All right. Thank you very much.
Chairman Flood. The gentlelady yields back.
I would like to ask unanimous consent to enter the
following letters into the record. We have one from the
SmarterSafer Coalition, dated April 22, 2026, and we have one
from the Arch Mortgage Insurance Company, dated April 22, 2026.
Without objections, these will be received.
[The information referred to can be found in the appendix
on page 56.]
Chairman Flood. The gentleman from Tennessee, Mr. Rose, is
now recognized for 5 minutes.
Mr. Rose. Thank you, Chairman Flood and Ranking Member
Cleaver, for holding this important hearing, and thank you to
our witnesses for being with us today.
Mr. Vidovich, in your testimony, you note that increased
capital and competition have helped drive down the cost of
reinsurance by making it more attractive risk-management tool--
making it a more attractive 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 or more than they collect in 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?
Mr. Vidovich. Thank you for the question, Congressman. The
industry is quite resilient and capable of meeting risk today
and into the future.
If we just look at the increased frequency and severity of
catastrophic weather-related events, the industry has seen what
used to be an exceptional year of $100 billion of insured
losses. We seen that 7 out of the last 10 years, and we have
seen losses in excess of that every year for the last 5 years.
Notwithstanding that, capital is moving into the
reinsurance space, as I said earlier. In Florida, in
particular, we are seeing the price of catastrophe reinsurance
drop because of the fact that capital is coming in to support
the market. There is a home for this risk in the private
market.
Mr. Rose. Thank you. I appreciate that.
Dr. Wachter, in your testimony, you emphasize 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 buildup of
systemic risk compared to traditional indicators like
delinquencies or foreclosures.
Ms. Wachter. It is extremely efficient in comparison with
existing measures. The existing measures are often delayed,
backward looking, or simply do not operate.
So, for example, default and foreclosure happen after the
crisis. Particularly foreclosure can be months, years after the
crisis. It is not a signal at all. Default itself is not a
signal of a bubble that is building. As a bubble builds, prices
increase. 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.
As I was watching the leverage and risk buildup in the
great--the buildup in the great financial crisis, I with others
was noting, and we were not 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. In the buildup, 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, and very, very
subtle risk even, it does price. We see that in the risk of
coming from Hurricane Harvey and Katrina in the paper that--
sorry. Harvey and Irma, the paper I referenced earlier. We also
see it in the COVID experience. In the COVID experience, CRT
prices gapped out tremendously, as they appropriately should
have, and that occurred.
Mr. Rose. Sorry to interrupt you, but in the interest of
time, is there a way as policymakers that we can--because what
you are saying makes complete sense to me, is there a way we
can tap into that information and use it more effectively to
overt future financial crisis?
Ms. Wachter. Absolutely there is a way to tap into that,
and there is--it is traced continuously. The Federal Reserve
Economic Data (FRED) has the data continuously. You can watch
it, look at it. In particular, I think it would be useful at
moments of crisis, such as COVID, to consider it. All
policymakers can and should make use of this information. I am
sure many are, and there can be more--it is a bit of an obscure
market, but it is working.
Mr. Rose. Thank you. I see my time has expired. I yield
back.
Chairman Flood. The gentleman yields back.
The gentlewoman from Georgia, Ms. Williams, is now
recognized for 5 minutes.
Ms. Williams of Georgia. Thank you, Chairman Flood and
Ranking Member Cleaver, for holding this hearing.
Thank you to all of our witnesses because we are going
through a housing crisis in my hometown of Atlanta, Georgia,
and I welcome your expertise today.
Owning a home is one of the most important ways American
families build wealth. It is how working families get a
foothold in the middle class. If we want to expand
homeownership in this country, we need the systems behind
mortgage lending to work well and fairly.
Let me explain what we are talking about today, and perhaps
you can help me with this explanation for the people back home.
When you buy a home, your bank does not just hold your
mortgage. It bundles your loan with thousands of others and
sells them to Fannie Mae and Freddie Mac but, when those
companies are holding all that risk and loans go bad,
taxpayers, homeowners, my constituents, the American people,
they are on the hook.
We learned that the hard way in 2008. Following the 2008
collapse, institutional investors bought thousands of single-
family homes on the cheap turning Atlanta into ground zero of
an investor takeover of the housing market. Credit risk
transfer could have mitigated this risk of corporate landlords
in Atlanta by enhancing market discipline 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 2008 crisis 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 2008 created a persistent housing shortage that has
fueled an affordability crisis that continues to loom in
Atlanta today.
CRT lets Fannie and Freddie pass some of that default risk
to private investors, so losses do not fall entirely on the
American people. Today I want to understand how well it is
working for the financial system and for the families that I
represent.
Dr. Wachter, in your testimony, you describe CRT as a tool
for spreading risk broadly so it does not 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? Distress in the CRT market will
ripple back to the people at their kitchen table.
Ms. Wachter. Thank you for that question. It is a very
important question. What we saw in COVID was indeed the--in
March 2020, the price of risk increased dramatically as
unemployment increased to 15 percent. The 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 an important response, the Coronavirus Aid, Relief,
and Economic Security (CARES) Act, forbearance. These are
important programs. The indicators of risk, including the
elevated unemployment rate, including the pricing of CRT, were
indicators, and I am sure helped inform 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,
immediately post-COVID in 2020, and mortgage rates were not
increased. Fannie and Freddie stayed in the market. If they had
been privatized, this would not have occurred, and the health
crisis that we as a country were undergoing would have been
accompanied by a financial crisis as well.
Ms. Williams of Georgia. Thank you, Dr. Wachter.
Mr. Vidovich, am I pronouncing that correctly? My name is
Nikema. So, I try to get the names right.
Mr. Vidovich. It is Vidovich but thank you.
Mr. Williams. Vidovich. Mr. Vidovich, expanding affordable
homeownership is a priority for many of us on this committee on
both sides of the aisle because we know how it is impacting our
constituents regardless of what party they vote for. If Fannie
and Freddie develop new mortgage products aimed at getting more
families into homes, is the private market capable of stepping
up and pricing that kind of risk?
Mr. Vidovich. 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 that would be constructed as a
result of those new products.
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.
Ms. Williams of Georgia. 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. I want to leave here today committed to
making that happen.
With that, Mr. Chairman, I yield back.
Chairman Flood. The gentlelady yields back.
The gentleman from Montana, Mr. Downing, is now recognized
for 5 minutes.
Mr. Downing. Thank you, Mr. Chairman, and thank you to the
witnesses.
I am happy we are having this hearing to explore ways that
federally backed programs can and have been reducing the risk
of losses born by taxpayers.
Of particular interest to me has been NFIP, the National
Flood Insurance Program, and I want to make sure that Montana
ratepayers and taxpayers are not penalized with higher premiums
or exposure there to subsidize lower rates in high-risk areas.
That has been a concern of mine. As a former insurance
commissioner, I have been thinking about this for a while.
I am going to start a little bit broader about a proposal
that has been circulating in Congress and amongst some think
tanks of the idea of creating a Federal property reinsurer. I
firmly believe that the Federal Government should get out of
the business of insurance to the greatest extent possible, and
that is one of the reasons that I have a bill to eliminate FIO,
the Federal Insurance Office. I really believe in State-based
regulation. I believe the private market should take this up.
So that is something that I am supporting.
I am going to start with Mr. Theodorou. You know, you have
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?
Mr. Theodorou. Thank you for the question. Indeed, I have
seen that federally backed--or Federal reinsurance is not a
good idea because it does the opposite of what reinsurance is
designed to do. Reinsurance achieves a spread of risk whereas,
if you remove the providers of the risk from the global
environment--and it is strictly done in the United States--then
you are concentrating risk because the U.S. actually has more
natural catastrophes than other regions of the world. So, it is
not a good idea from that point.
The last hearing, as Congressman Flood indicated, on this
subject of reinsurance was in 2007, and at that hearing, the
Chairman of the Council of Economic Advisers, Ed Lazear, made a
really passionate presentation on why, after 2004, 2005, the
Federal reinsurers is not the answer. I have indicated in my
testimony earlier that, if you have Federal reinsurance, that
crowds out the private market, and it suppresses the
transmission of signal of price, and also it does a counter
subsidy of subsidizing those with large million-dollar homes,
and smaller ones pay for it. On many fronts, it was a bad idea.
Fortunately, it was not carried through, but it has come up a
few times with this similar kind of proposal.
Mr. Downing. Yes. Well, I appreciate that. Thank you for
your testimony there.
To shift gears really quickly, Mr. Chairman, I request
unanimous consent to submit for the record Mr. Theodorou's
piece titled ``Why a Federal Reinsurer Remains a Bad Idea.''
Chairman Flood. Without objection.
[The information referred to can be found in the appendix
on page 64.]
Mr. Downing. Thank you. Now, on NFIP specifically, I am
going to move to Mr. Walker here, can you describe how the NFIP
has benefited from private insurance?
Mr. Walker. Thank you for the question. So, as discussed on
this panel, diversification and private capital has been
immensely helpful to a lot of private--or public entities. The
reinsurance marketplace provides pricing feedback and provides
capital that can pay claims in a fast amount of time.
After Hurricane Harvey, for example, the program in its
inception year recovered a billion dollars from the reinsurance
industry paid in a timely fashion.
Mr. Downing. Yes. There was a notable increase in
reinsurance participation NFIP program from 2024 to 2025. So,
just going, why do you think that is?
Mr. Walker. I am not an expert in the NFIP program myself,
but as Mr. Vidovich has testified, there is more capital
available in the reinsurance industry to take on property
catastrophe risks, which I assume is correlated.
Mr. Downing. Thank you. I will move to Mr. Vidovich. Can
you discuss how the NFIP uses the insurance-linked securities
markets to transfer risk?
Mr. Vidovich. Yes. In addition--thank you for the question.
Yes, in addition to the use of traditional treaty reinsurance,
the NFIP has gone into the catastrophe bond space and used
catastrophe bonds as a way to protect the NFIP from extreme
tail risk.
Mr. Downing. The strategy compared to traditional
reinsurance, what are the advantages and disadvantages?
Mr. Vidovich. As I testified earlier, reinsurance has a
number of different--takes a number of different forms, and
catastrophe bonds meet the investment needs of a group that see
them attractive for that extreme tail risk.
Mr. Downing. Well, thank you. Unfortunately, we ran out of
time.
Mr. Chair, I yield.
Chairman Flood. The gentleman yields back.
I would like to thank all the witnesses for your testimony
today.
Without objection, all members will have 5 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 27,
2026.
[The information referred to can be found in the appendix.]
With that, this hearing is adjourned.
[Whereupon, at 11:17 a.m., the subcommittee was adjourned.]
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