On the surface, it seems like a move to protect taxpayers: in 2016, Fannie Mae and Freddie Mac will ramp up sales for a new mortgage bond that will transfer the cost of default on their riskiest mortgages to private investors. It will protect taxpayers from another bailout, FHFA says. But as the Wall Street Journal’s Joe Light reports, FHFA is turning to a crisis-era tool and quietly giving birth to a new asset class in the process.

Light explains:

The securities will be based on the value of a pool of underlying mortgages—but only indirectly, making them a derivative similar to those that figured in the financial crisis seven years ago.

The insurance-like products are called Connecticut Avenue Securities by Fannie Mae and Structured Agency Credit Risk by Freddie Mac. Standard-issue bonds from the housing giants protect investors from the risk that home buyers will stop making payments on their loans. With the new securities, however, investors could lose some or all of their principal if the underlying mortgages default.

Call it creative financial engineering in the absence of broader housing finance reform.

Will banks go for it?

Right now, banks can be more lenient in their lending and offer better loan products for lower- and middle-income home borrowers because those loans can then be sold to Fannie Mae and Freddie Mac, with the understanding that if the loans default, Fannie and Freddie will cover the costs. With this new model, Fannie and Freddie will still sell traditional mortgage bonds, but they will sell new derivatives linked to all but the safest mortgages. Can banks really count on investors repaying those loans in the event they default? Investors don’t have the same cushy promise of bailout that the GSEs do.

The goal is to get back to pre-Recession lending practices, in which the appetite for privately backed mortgage bonds was strong. While the 2008’s bubble burst is in the rear-view mirror, it isn’t that far in the rear-view mirror for some banks.

“We’re going from no place to some place,” said Lewis Ranieri, a former bond trader and founder of investment firm Ranieri Partners. Ranieri co-invented the mortgage-backed security.

In exchange for the risk, investors of these securities would be poised for much higher yields than Fannie Mae and Freddie Mac  realized.

While Light’s characterization that Fannie Mae and Freddie Mac are returning to post-crises lending practices is accurate, it’s not fair to say that Fannie Mae and Freddie Mac are “giving birth” to a new asset class. In practice, the Connecticut Avenues Securities are not all that different than commercial mortgage-backed securities or non-agency MBS packages. Fannie is still required to hold a first-loss piece (which might change down the road) so they will be incentivized to package somewhat stable loan packages through this fund. Overall losses are projected to be low (less than 5%).

When investors do incur losses, the losses on these bonds are similar to the buyout prepayments on agency collateralized mortgage obligations (CMOs). Except in this case, instead of receiving a prepayment, lower-tiered investors take the loss that the GSEs would have incurred.

The non-agency MBS market has been floundering for some time now; this provides a new avenue for investors to jump back into the space while allowing the GSEs to retain their brand name. If nothing else, this seems like a better avenue for investors versus those who invested in Fannie Mae and Freddie Mac directly. We all know how that’s playing out for shareholders.

Though these changes offer greater protection to taxpayers, it’s still not a replacement for broader housing finance reform. Don’t forget: these lending practices were around in 2007 and we still weren’t protected from a bailout. Not even close.

Housing Market Fannie Mae