Edward J. DeMarco, Acting Director of
the Federal Housing Finance Agency (FHFA) appeared before the Senate Banking
Committee today. According to his
prepared remarks DeMarco will tell the senators about the progress his agency
has made in its dual role as conservator of the two government sponsored
enterprises (GSEs) Freddie Mac and Fannie Mae and as regulator of the Federal
Home Loan Banks (FHLBanks.)
DeMarco briefly recapped the goals set
for FHFA as conservator and what has been accomplished to date.
operations of the GSEs have largely stabilized while both mortgage originations
and securitizations continued to function throughout the financial crisis.
focus on foreclosure prevention efforts has been critical to helping homeowners
in distress and essential to meeting the conservatorship mandate to preserve
and conserve the GSEs' assets.
has clarified that the GSEs would be limited to continuing their existing core
business and, while there is still legacy credit exposure to work through,
there is now in place loss mitigation infrastructure to help borrowers and
With these accomplishments FHFA has
into a third phase of
conservatorship and its 2012 Strategic Plan presents three goals.
1. Build a new
infrastructure for the secondary mortgage market.
2. Gradually contract the
the marketplace while simplifying and
shrinking their operations.
3. Maintain foreclosure prevention
activities and credit
availability for new and
has covered these three goals in previous House and Senate testimony and in
numerous public remarks. A summary of
the Strategic Plan from a 2013 perspective is available here along with a discussion of the proposed new
securitization platform and uniform contracts which DeMarco also described in
detail in today's testimony.
DeMarco reviewed some recent FHFA
changes which include a new streamlined loan modification initiative that will
require servicers to automatically offer eligible delinquent homeowners an easy
way to lower monthly payments and modify their mortgage even without providing
complete packages of documentation.
FHFA has also changed the representation and warranty framework for
conventional loans sold or delivered to the GSEs. These changes clarify lenders' repurchase
exposure and liability and move the focus of quality control forward to the
time loans are delivered to the GSEs rather than at the occasion of default.
The second strategic goal set for
the conservatorship is to contract the GSEs' presence in the marketplace. As part of this FHFA has set a target of $30
billion of unpaid principal balance in credit risk sharing transactions in the
single-family credit guarantee business of both GSEs. To accomplish this the
GSEs are encouraged to consider transactions involving expanded mortgage
insurance, credit-linked securities, senior/subordinated securities, and
perhaps other structures. The goal
for 2013 is to move forward with
these transactions and
to evaluate the pricing
and the potential for further
execution in scale.
DeMarco said FHFA expects to continue increasing
in 2013 as a way to contract the GSEs' market presence and encourage private
capital back into the market, not as a revenue measure. He thanked senators for passing a resolution
prohibiting the use of these fees for non-housing related purposes.
FHFA is setting a target
10 percent reduction
in new multifamily business
from 2012 levels. This will probably be
achieved through some combination of increased pricing, more limited product
offerings, and tightened underwriting standards.
DeMarco said FHFA
was also setting a target of selling an additional five percent of the liquid
portions of the GSEs' retained portfolios above the 15 percent currently
required by the revised Preferred Senior Stock Purchase Agreements. DeMarco said that given natural run-off in
the portfolios they would likely have satisfied the PSPA reduction targets in
the next few years so requiring them to sell from the less liquid portions of
their retained portfolios (delinquent loans and their own MBS) should lead to
an even faster reduction than required by the PSPA.
other priorities for FHFA in 2013. One
is the near-term efforts regarding mortgage insurance, updating master policies
by clarifying the role and responsibilities of carriers, especially when
servicers pursue loss mitigation to help delinquent borrowers and formulating
new eligibility standards to ensure financial, operational, and management
capacity of the counterparties
Another project is the development of an
aligned set of standards for forced or lender-placed insurance. FHFA intends to address certain practices
related to this insurance including sales commissions received by sellers and
servicers when placing and maintaining coverage with particular insurance
providers through entities owned or controlled by the seller or servicer. It also hopes to establish a set of standards
that might be adopted by a broader set of mortgage market participants similar
to what was done with the Servicing Alignment Initiative.
that while planning for the future, FHFA continues to fulfill its supervisory
role with both the GSEs and the FHLBanks.
The agency has strengthened its supervision and oversight of GSE
activities and, in the last year has put in place several changes that will
allow it to quickly and effectively respond to emerging risks and developments. In 2013 FHFA intends to:
the risks posed by new initiatives, including the new securitization platform,
contract harmonization, and multifamily and REO disposition programs, to insure
they are being implemented under a sound control framework.
understanding of the Enterprise's
risk profile, particularly for the incremental
risk created by implementing the new initiatives while
maintaining and upgrading information systems and internal controls.
Determine if the
board and management are taking appropriate steps to
comply with conservatorship and
a formalized process for
the ongoing monitoring program.
Implement the CAMELSO rating system.
the current financial condition of the GSE's, both of which posted positive net
income in the most recent quarter, and the FHLBanks, DeMarco turned to the
issue of the future role of the government in housing finance and how large
that role should be.
while the role of government is ultimately up to the lawmakers, in his opinion
the main purpose of housing reform should be to promote the efficient provision
of credit to finance mortgages for single-family and multifamily housing. An efficient market system for providing
credit to people who want to buy houses should (1) provide consumer choice, (2)
provide consumer protections, (3) allow for innovation by market participants,
and (4) facilitate transparency.
The size of government's present
role can be measured in several ways; the proportion of loans that are
government guaranteed (65 percent), a flow basis (84 percent) or by securities
issuance (over 90 percent. "However
Demarco said, "it should be clear that today's housing finance market
is dominated by government
DeMarco said the question is how
do we move from the market of today where almost all new single-family
originations have some form of government support to a future market far more
reliant on the private provision of mortgage credit.
From the point of view of an economist,
the answer to the size of
government involvement begins with consideration of a potential market
failure. One type of failure might arise
if market participants have undue or unnecessary concerns about the ongoing stability
and liquidity of mortgage credit in a purely private market across various
economic environments. If this view
prevails less credit will be provided than in the absence of this type of
uncertainty. Government response in this
case could range from establishing standards and greater transparency for the
market, providing liquidity or credit support, or providing a guarantee to
largely eliminate uncertainty.
Another potential market
failure is the positive externality associated with homeownership. In this
view, the benefits of
homeownership extend beyond
individual household to the
of society, i.e.
the opportunity to build family wealth, the willingness of homeowners to
improve their property; hence if left
solely to the market
the number of homeowners will
be less than optimal. A common
government approach to increase market
is to provide some type of subsidy or other assistance to encourage or facilitate such
subsidies to lower the cost of mortgage credit
or easing the
mortgage are methods
of delivering subsidies through
the housing finance market.
There seems to
be relatively broad agreement that the model of providing private companies
with benefits while expecting them to achieve public policy goals does not work. The first option to this would be
to establish standards and rules for enforcing contracts that would provide a
degree of certainty to investors.
Investors would be required to price their risk and enforce their rights
under standard contracts.
The second options
would be to create a federal backstop that would preserve the availability of
credit in times of stress. For example,
could the Treasury Department, the Federal Reserve or the Federal Home Loan
Banks play such a role in a market with a standardized framework?
The third option
is for a secondary market that would operate with some type of government
guarantee somewhat similar to what exists today but one in which private sector
capital would stand in first loss position with a guarantee, funding through an
insurance premium to cover additional losses.
concluded his testimony by saying that "few could have imagined in 2008 that we would
be approaching the fifth anniversary of placing
Freddie Mac in
that we have made little
to bring these government conservatorships to an end." They were never intended to be a long term
solution, he said, and the housing finance system cannot really get going again
until Congress removes the cloud of uncertainty the conservatorship represents.