Melvin L. Watt, Director of the Federal Housing Finance
Agency (FHFA) told the Senate Banking Committee today that Freddie Mac and
Fannie Mae (the GSEs) will soon announce they will begin purchasing loans with
downpayments of 3 or 5 percent, similar to those offered by FHA. Watt made the announcement in remarks prepared
to update to the Committee on the GSEs and the Federal Home Loan Banks for
which FHFA is regulator. The agency also
serves as conservator of the two government sponsored enterprises.
Watt summarized the financial performance of the GSEs as
significantly improved since the conservatorship began in 2008. While both entities have posted profits every
quarter since the beginning of 2012 he said that some of the increased
performance relates to one-time or transitory items, such as the reversal of each
GSE’s deferred tax asset valuation allowance, legal settlements, and the
release of loss reserves associated
with rising house prices. Other portions of the improvement are attributable to such factors as strengthened underwriting
practices and increased guarantee fees.
Watt said that while the GSEs’ financial condition and that
of the mortgage market has stabilized, significant challenges such as continued
elevated delinquency rates and counterparty exposure remain concerns.
Counterparty risks are in fact the focus of several supervisory
guidance documents prepared by FHFA for the GSEs. One bulletin outlined the agency’s
expectations about the increasing numbers of transfers of mortgage servicing of
GSE owned or guaranteed loans from federally-regulated banks to non-bank
entities that typically have less regulation and more concentrated
operations. These transfers were
identified by the Financial Stability Oversight Council as presenting heightened
The bulletin specifies that the GSEs should approve such transfers
only when they are consistent with sound business practices, aligned with each GSE’s board-approved risk appetite, and
in compliance with regulatory and conservator
requirements. They should also be
subject to risk-based monitoring so that all servicing transfers occur
in a timely manner and in accordance
with approved terms, servicing guide requirements, and applicable mortgage servicing transfer-related laws
risk area FHFA has addressed is that of information security. In a bulletin FHFA stressed its expectations
that assessment of system vulnerabilities, effective monitoring of cyber risks, and oversight of third parties that have
access to GSE data would be key components GSE cyber risk management.
FHFA’s 2014 Strategic Plan for the
Conservatorships of Fannie Mae and
Freddie outlines FHFA’s conservatorship
objectives for the GSEs and the 2014 Conservatorship Scorecard details
activities and expectations for the Enterprises during 2014. Watt said both
the 2014 Conservatorship Strategic Plan and the 2014 Conservatorship Scorecard are centered around three strategic goals and outlined for the Committee some
of the accomplishments under each.
Strategic Goal 1:
Maintain, in a safe and
sound manner, foreclosure prevention activities and credit availability for new and refinanced mortgages to foster
liquid, efficient, competitive and
resilient national housing finance markets.
FHFA is continuing the process of updating and clarifying
the Representation and Warranty
Framework which provides the GSEs with remedies – including requiring a lender
to repurchase a loan – when they discover that
a loan purchase does not meet their underwriting guidelines. This has focused on placing increased attention and
resources on upfront quality control reviews in order to identify problems,
possibly even before loans are purchased and thus reduce lenders uncertainty
about repurchase requirements and paving the way for reduction of current
credit overlays and borrower costs.
The first improvements in this framework went into effect in
January 2013 and there were additional refinements in May 2014. FHFA has now announced an agreement in principle
that will clarify and define the life-of-loan exclusions applicable to the
The smaller downpayment requirements expected shortly for
GSE loans will require that borrowers have compensating factors and risk
mitigants such as housing counseling or lower debt-to-income rations in order for
the mortgage to be eligible for purchase. Additionally, like other loans with
down payments below 20 percent, these
loans will require credit enhancement, such as private mortgage insurance.
The GSEs have continued to reach out to small and rural lenders
and Housing Finance Agencies to strengthen their understanding of how the GSEs might better serve them. Watt said these
community-based institutions have a vital role serving rural and underserved markets across the
country and FHFA knows that many of them could not be active in the housing
market without access to a liquid secondary housing finance
The GSEs have continued to focus on loss mitigation and borrower assistance activities and as
of August 31, 2014 had conducted more than
3.3 million foreclosure prevention actions since entering conservatorship. Watt said there are still areas of the country
where the housing recovery has lagged and homeowners still need assistance so
FHFA has worked to improve foreclosure prevention with efforts such as the
Initiative which is targeting Detroit and Chicago for a pilot program and with
programs to make consumers aware of the Home Affordable Refinance Program
(HARP). The GSEs also developed
Streamlined Modification programs to address
documentation challenges associated with traditional modifications,
including for deeply delinquent loans.
For individuals and families who rent rather than buy,
continuing to support affordable rental
housing is also an ongoing priority for FHFA and the GSEs and the Strategic
Plan and Scorecard maintain the GSE’s multifamily production levels. FHFA has also
continued to emphasize the GSEs’ role in the
affordable rental housing market, and has provided them with additional
capacity to provide financing for such
Strategic Goal 2: Reduce taxpayer
risk through increasing the role of private capital in the mortgage market
FHFA has reformulated this goal so that it no longer involves specific steps to
contract the GSEs’ market presence but rather focuses on ways to scale back their overall risk exposure. One initiative has been to strengthen the
GSEs’ counterparty requirements for private mortgage insurers and the agency is
reviewing comments in response to draft Private
Mortgage Insurer Eligibility Requirements.
Its assessments and policy decisions will take into account both safety
and soundness considerations and
possible impacts on access to credit and housing finance market liquidity.
FHFA also increased the 2014
Scorecard target to achieve a meaningful credit
risk transfer of $90 billion in unpaid principal balance, up from $30 billion
in 2013 and has encouraged the GSEs to test multiple types of credit risk
transfer structures, which include
securities-based transactions and insurance
As of November 1, 2014, Fannie Mae has transferred the
credit risk associated with $183 billion
in unpaid principal balance of single-family mortgages, and Freddie Mac has
transferred credit risk associated
with $169 billion in unpaid principal balance of single-family mortgages. In each transaction, the GSEs retained a
small first-loss position in the underlying loans, sold a significant portion of the risk beyond the initial loss and
then retained the catastrophic risk in the
event losses exceeded the private capital support. The GSEs also continue to reduce the size of
their retained mortgage portfolios
consistent with the terms of their agreement with the Treasury Department.
Strategic Goal 3: Build a new single-family
securitization infrastructure for use by the
GSEs and adaptable for use by other participants in the secondary market
in the future
FHFA’s final strategic goal is to BUILD a new infrastructure
for the GSEs’ securitization
functions which includes development of the Common Securitization Platform (CSP) infrastructure and to improve the
liquidity of Enterprise securities. Progress in 2014 includes the identification
of a Chief Executive Officer for Common Securitization
Solutions (CSS), the corporate entity which is owned jointly by Fannie Mae and
Freddie Mac and will ultimately house and operate the CSP. The
governance structure and operating agreements concerning the CSS have been finalized and considerable
progress made on the design-and-
build phase of the CSP.
In pursuing a Single Security for the two GSEs FHFA’s top
priority is to deepen and strengthen liquidity in the housing finance markets. Today the mortgage-backed securities issued by Fannie Mae and Freddie Mac trade in
separate “to-be-announced” (TBA) markets where there is a price disparity
between them largely due to greater
trading volumes of Fannie Mae securities.
This imposes an additional cost on Freddie Mac to remain competitive.
Watt said one of his first decisions as FHFA director
was to suspend scheduled increases in guarantee fees believing that the subject
required more feedback from stakeholders. The agency requested comment both on
those increases and on proposed GSE housing goals for 2015 through 2017 and is
currently reviewing both sets of comments with an eye to both safety and
soundness of the GSEs and the possible impact on access to credit and housing
finance market liquidity. .
Turning to the Federal Home Loan Banks (FHLBanks), Watt said
the system remains strong. Their
aggregate balance sheet has increased over the
past two years, but remains considerably smaller than in peak years.
Advances totaled $545 billion as the
end of the third quarter of 2014, up from $499 billion at year-end 2013, but
down 50 percent from a peak of $1.01
trillion in the third quarter of 2008.
Watt says his agency’s supervision of the FHLBanks’ expanding
mortgage programs involves oversight of operational
issues required by two new products – Membership Partner Finance (MPF) Direct and MPF Government MBS. The FHLBank of Chicago is likely to begin offering both of these late this
year or early next. Under MPF Direct,
participating members would sell non-conforming
and conforming, single-family, fixed-rate mortgage loans to the Chicago Bank, which would concurrently sell the
loans to a third-party private investor for securitization. The Chicago Bank expects, at least initially,
that loans sold will be “jumbo
conforming” loans – capped at $729,750 for single unit loans in the contiguous United States.
Under the second program, the bank would purchase government guaranteed or insured loans,
accumulate the loans on its balance sheet eventually pooling them in securities
guaranteed by the Government National Mortgage
Association (Ginnie Mae).