directly acknowledging the protests that have come from both the public and
private sectors about his decision to unilaterally lower loan limits, Edward J.
DeMarco, acting director of the Federal Housing Finance Agency (FHFA) backed
off a bit in a speech on Thursday.
DeMarco announced last summer that limits on the size of loans eligible
for purchase or guarantee by Freddie Mac and Fannie Mae (the GSEs) would be
reduced from their current limits.
FHFA and its
predecessors traditionally announce new, almost always higher, loan limits in
November, to be implemented at the first of the following year. The current
limit of $417,000, has been renewed each year since the beginning of the
financial crisis however the ceiling on county-by-county exceptions for high
value areas was lowered in 2012 to $625,500.
a speech before Zillow and the Bipartisan Policy Center said he understands the potential timing issues associated
with a change in limits given the other regulatory changes taking place at the
same time. Therefore, while FHFA will
follow the usual November timetable in announcing 2014 conforming loan limits,
it would provide six months' notice before implementing the change. Any reduction would be across the board, he
said, not just in some parts of the country.
The agency will also provide further information in November on
potential reductions in the size of loans the GSEs will guarantee going
change had been rumored earlier
this month after DeMarco was strongly criticized by many industry groups,
including the National Associations of Realtors and Home Builders for the
decision and the legal basis of his authority questioned. Thirteen members of the Senate also sent a
letter earlier this month challenging him to demonstrate his authority to raise
the limits and provide an analysis of the impact of such action.
that while ideas about timing and methods vary, there is a general desire among
stakeholders to reduce government's footprint in mortgage financing and
encourage private capital to reenter the market. Lowering loan limits is just one of the tools
FHFA has to accomplish this objective, he said.
A second method is to increase GSE guarantee fees which
currently average 50 basis points, about double what they were prior to
conservatorship. Increasing these fees
brings their pricing for credit risk closer to what would be required by
private sector providers. "While
that level is difficult
to evaluate with precision," DeMarco said, "I believe we are getting closer
to a level that would encourage more private sector participation." Any additional changes going forward would be measured
and gradual so as not to
tool is risk sharing which is important for reducing the taxpayers' long term
risk exposure. The Acting Director said
one of FHFA's 2013 Scorecard targets is for each of the GSEs to achieve $30
billion in risk-sharing transactions and both Freddie Mac and Fannie Mae have
recently completed securities-based transactions and Fannie Mae laid off
substantial risk to a private mortgage insurer.
forward, he said, he expects to see other types of transactions such as senior/subordinated structures for certain
portions of the Enterprises' mortgage guarantees. These
alternative approaches will contribute to efforts to build for the
future by helping
to develop a securitization infrastructure that is
less reliant on the Enterprises' traditional GSE securitization model.
DeMarco said it is clear the GSEs, which
had a failed business model, will cease to operate in their
current form at some future date and FHFA's strategic plan is designed to
prepare the companies and the market
for that date, while maintaining stability and liquidity from now to then. The
agency will soon establish multi-year targets for the GSEs to contract the
footprint, maintain liquidity and borrower assistance, and build for the
certain assets, functions, and employees at
the two companies will be
repositioned in the private sector
by the end of the conservatorships. In the meantime, each company will need to enhance
their core operations that
to operate in the marketplace and
to gradually sell or wind down certain operations
not expected to go forward.
The GSEs' retained portfolios have been steadily declining since 2009
and their composition has changed significantly.
Prior to conservatorship
they were dominated by the GSEs' own mortgage-backed
securities and performing whole loans. As those
securities have been paid down, and as the
need to work through delinquent loans increased,
the retained portfolios changed from being relatively liquid to
being less liquid.
2013 goal of selling 5 percent of the less liquid portion of the portfolios,
i.e. the retained portfolios excluding agency
securities has been executed
well. Going forward, given
that FHFA is not repositioning the retained portfolio
business of the GSEs it will look
for additional ways to
shrink this business line over an appropriate time horizon.
The market appears to have absorbed the GSEs goal of
contracting their multifamily involvement market by 10 percent in 2013 without
major disruption. Without a legislative
path informing the repositioning of this market FHFA will continue to take
gradual steps to reduce multifamily exposure while maintaining a market
praised the work of the Bipartisan Policy Center in providing a framework for
legislation. A key feature required 10
percent private sector exposure in front of any guarantee and this was picked
up in early efforts in the Senate.
there is going to be a government guarantee of this
type," he said, "it must have sufficient private capital standing in front of that guarantee, or we will be to some degree re-creating the failed GSE business model." The
PATH Act proposed in the House has proposed a different course based on
developing standards and infrastructure
to bring liquidity and efficiency
to the mortgage market, as opposed to establishing a new government guarantee. Both
bills, he said, are worthy of serious