The Federal Housing Finance Agency (FHFA) recently released its 2013 Conservatorship Scorecard detailing the progress made by the government sponsored agencies (GSEs) Freddie Mac and Fannie Mae in meeting the strategic goals set for them so far this year under FHFA's 2012 Strategic Plan. The plan sets forth three principal goals for the current phase of the GSE conservatorship:
1. Build a new infrastructure for the secondary mortgage market;
2. Gradually contract the Enterprises' dominant presence in the marketplace while simplifying and shrinking their operations; and
3. Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.
Reduction of the governments risk in the single-family mortgage credit market requires giving investors greater certainty and confidence in the rules, policies, data, and disclosures used in mortgage securitization. In order to build a new infrastructure for single-family mortgage securitization the GSEs need to develop a model Contractual and Disclosure Framework (CDF) that will help foster that certainty and confidence.
The GSEs made significant progress toward achieving interim goals in developing that framework. A joint GSE team has analyzed and compared certain policies and practices relating to fully guaranteed mortgage-backed securities (MBS) while noting comparable practices in the private-label market. By year-end 2013 the team will recommend ways to align the GSEs' policies and practices in each area. The team has focused on identifying best practices for non-guaranteed MBS, including those partially guaranteed by the GSEs and has begun a review and analysis of differences in the GSEs' Master Trust Agreements.
The second major element of the new infrastructure for single-family mortgage securitization being developed is the Common Securitization Platform (CSP) which will consist of integrated hardware architecture and software applications that the GSEs and eventually other, fully private firms will be able to use to perform major aspects of the securitization process.
FHFA and the GSEs have made significant progress toward achieving each of these goals. Achievement of the longer-term objectives of the CSP remains a significant undertaking, as implementation of the platform encompasses both a complex technology project and significant changes in Enterprise business processes. Progress made by the GSEs and FHFA thus far include:
- Formation of a GSE joint venture business entity, Common Securitization Solutions, LLC (CSS). CSS will own the CSP and related business and operational functions. An executive search for an independent Chairperson of the Board of Managers and Chief Executive Officer who will govern the corporation is well underway
- Commercial office space has been leased for a period of three years for CSS in Bethesda, Maryland. Next year staff, provided up to now by the GSEs, will transition to being independent from them and will move into the new building.
- FHFA and the Enterprises are also developing the key legal documents and business infrastructure for the CSS covering items such as capital contributions by the GSEs, allocations of profits and losses, the structure of the Board of Managers, voting rights, identification of "significant matters" requiring super-majority voting, and the handling of intellectual property rights.
- The team building the platform has made significant progress on developing the design, scope, and functional requirements for the five CSP's modules which will perform the data validation, security issuance, disclosure, master servicing, and bond administration functions as well as transactional data stores, an integrated data store, and other components. To date, the team has achieved a number of milestones in the development and testing of the platform, all in a non-production environment.
- In addition to the continued work on the platform's core processing software, the CSP team and Enterprise staff have been working on other critical business operations including the development of detailed diagrams of business processes and data flows and the testing of completed software.
Under the Uniform Mortgage Data Program (UMDP) the GSEs are collaborating with industry to develop uniform data standards for single-family mortgages. Data standardization will allow all types of lenders to participate in the secondary market and make it far easier and cheaper for them to acquire technology from third-party venders. The GSEs have implemented three key phases of UMDP, the Uniform Appraisal Dataset, the Uniform Collateral Data Portal, and the Uniform Loan Delivery Dataset. In September each GSE submitted white papers to FHFA that address strategies for data standardization, collection, and use under the three initiatives.
Each GSE has been working to develop and execute transactions that transfer single-family mortgage credit risk to private investors and each has executed multiple transactions totaling more than $40 billion after first issuing historical data on the credit performance of relevant mortgages. Freddie Mac has sold two offerings of a new debt security backed by reference pools of 30-year fixed-rate mortgages and in October Fannie Mae a sold a similar type of debt security. In addition both GSEs have executed transactions to transfer credit risk on pools of mortgages to private insurance companies.
Under revisions made in 2012 to the Senior Preferred Stock Purchase Agreements (PSPAs) between the GSEs and Department of the Treasury the GSEs have had to accelerate the contraction of their retained mortgage portfolios. For 2013 the PSPA requires that each retained portfolio decline to $553 billion. As of the date of this Progress Report, each Enterprise's retained portfolio was less than that amount.
As a result of the reductions in the retained portfolios made pursuant to the PSPAs and GSE purchases of delinquent mortgages from pools backing guaranteed MBS, the portfolios are increasingly concentrated in less liquid assets. The 2013 Scorecard set a goal for each GSE to reduce these portions of the portfolio by 5 percent each year. As of the date of this progress report, each has achieved the 2013 scorecard objective, Fannie Mae by selling at least $21 billion and Freddie Mac by selling at least $15.7 billion of less liquid assets.
The 2013 Scorecard established the expectation that each GSE would reduce the unpaid principal balance of its new multifamily business by at least 10 percent relative to 2012 through various means such as tightening underwriting, adjusting pricing, or limiting product offerings, but could not increase the proportion of credit risk retained by the Enterprises. Each Enterprise has taken steps to meet this goal, and the market appears to have absorbed the changes in business volumes without major disruption.
Significant changes to the Home Affordable Refinance Program (HARP) in late 2011 led to a surge in program activity throughout 2012 that resulted in more than a million HARP refinances for that year, an amount equal to activity over the prior three years. As of August 2013, HARP refinances since program inception totaled more than 2.8 million. FHFA estimates that as many as 1 million more borrowers are HARP-eligible and is taking steps to reach those borrowers.
FHFA and the GSEs initiated the Servicing Alignment Initiative (SAI) in April 2011. It established consistent mortgage loan servicing and delinquency management requirements across the two GSEs including policies related to borrower contact, delinquency management, loan modifications, servicer incentives, and compensatory fees. In 2013, FHFA and the Enterprises announced additional enhancements to the program:
- A Streamlined Modification initiative that initiative allows servicers to solicit certain eligible borrowers who are delinquent between 90 to 720 days with reduced documentation requirements.
- Changes to the servicer incentives framework, eliminating the borrower response package incentives and related performance benchmarks and increasing the modification incentive structure under the Home Affordable Modification Program (HAMP) by $500.00.
- Extension of HAMP programs to align with the Treasury so all eligible mortgages must have a Trial Period Plan with an effective date on or before March 2016. The Enterprises also extended the Streamlined Modification initiative to December 2015 to correspond to the HAMP sunset date.
- Issuance of servicing requirements in response to the Consumer Financial Protection Bureau's final rule relating to early intervention and communication with delinquent borrowers, alternatives to foreclosure and right of appeals, foreclosure referral and foreclosure suspension, and error resolution.
Achieving the objective of maintaining credit availability for new and refinanced mortgages requires a viable private mortgage insurance (MI) industry to provide credit enhancement for loans with loan-to-value ratios over 80 percent. The 2013 Scorecard established the expectation that the GSEs would update and align counterparty risk management standards for mortgage insurers, including uniform master policies and aligned eligibility requirements.
FHFA and the GSEs have made considerable progress toward developing the new MI master policies and eligibility requirements. The joint team has worked through a master policy for each MI and anticipates approving by the end of 2013 the submission of the master policies to state insurance regulators for approval. The new master policies are scheduled to take effect in mid-2014. FHFA expects to solicit public feedback on proposed new MI eligibility requirements by the end of 2013.
The 2013 Scorecard required each GSE complete its review of pre-conservatorship loan acquisitions and complete demands for repurchase or restitution for breaches of representations and warranties. Using two methods, expanding existing capacities to conduct loan-by-loan file reviews and pursuing global settlements, the GSEs have resolved disputes with 10 lending institutions and has recovered more than $18 billion in lender payments so far this year.
"These accomplishments represent important steps that are helping to bring stability and liquidity to the housing market while also laying the foundation for a future, post- conservatorship housing finance system," said FHFA Acting Director Edward J. DeMarco. "Much more remains to be done and our work will continue while lawmakers decide a future course."
