The Federal Housing Finance Agency (FHFA) will not use its conservatorship authority to reduce current conforming loan limits. FHFA Director Melvin L. Watt said today that the proposal FHFA released last year regarding its intent to lower the loan amounts eligible for guarantees by Fannie Mae and Freddie Mac (the GSEs) had elicited much feedback from groups and individuals. The FHFA thoroughly reviewed and evaluated those remarks and its decision to leave limits alone, Watt said, "is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market."
Watt announced that decision in a speech to the Brookings Institute in which he presented his agency's 2014 Strategic Plan for the GSE conservatorship and its 2014 Conservatorship Scorecard. It was the first formal speech made by Watt since taking over the leadership of FHFA in January. He said he guessed that many people expected he would start talking about housing finance reform the moment he took over at the agency and he was well aware that the GSE conservatorship should never be viewed as a permanent or desirable end state. Housing reform is necessary but it is the job of Congress and the Administration to decide on reform legislation not that of FHFA, he states, "Instead, our task is to continue to fulfill our statutory mandates, to execute our Strategic Plan and to manage the present status of Fannie Mae and Freddie Mac."
Both the Strategic Plan and the Scorecard, Watt said, are built around three strategic goals; MAINTAIN, REDUCE, and BUILD. The first, to MAINTAIN the GSE's in a safe and sound manner requires the GSEs to carry out and strengthen were possible three aspects of their core business operations;
- improve liquidity in the present single-family housing market;
- continue to improve servicing standards and foreclosure prevention, and
- continue their critical role in the multifamily sector, particularly for affordable housing.
The overriding objective is to ensure that there is broad liquidity in the market, provided in a way that is safe and sound. While MAINTAIN is not a new goal, Watt said it has been moved to the forefront of the plan and the Scorecard weight given to it has been doubled from 20 to 40 percent.
He said he knows that representation and warranty standards and the risk of repurchase remain a top concern for the mortgage industry and that lenders feel there the uncertainty in this area means they cannot ease their credit overlays. This undermines the goal of improving credit access for creditworthy borrowers. There have been extensive discussions with the GSEs and with lenders which have led to refinements to address these concerns. First the GSEs are going to relax the payment history requirement by allowing two delinquent payments in the first 36 months after a loan is acquired. Lenders will also get loan level confirmations when mortgages meet this performance benchmark and when they pass a quality control review. The GSEs will also eliminate automatic repurchases when a loan's primary mortgage insurance is rescinded.
FHFA is also working toward clarity about life loan exemptions and how they apply to loans that have passed quality control reviews or have met the 36 month benchmark. The agency is also planning to explore the following over the next year
- Establishing an independent dispute resolution program when lenders believe a repurchase is unwarranted;
- Developing cure mechanisms for loan defects rather than relying solely on repurchases; and
- Providing additional clarity on Fannie Mae and Freddie Mac underwriting rules.
Watt said that loan limits and debt-to-income (DTI) ratios are two factors that relate to the overall scope of mortgages guaranteed by the GSEs. In addition to its loan limit decision, FHFA will continue to permit lenders to use compensating factors in underwriting loans where DTIs exceed 43 percent.
Another part of the MAINTAIN goal involves continued refinement and improvement of servicing and foreclosure prevention standards where experiences in recent years have revealed serious weaknesses. Improvements have been made, Watt said, but there is room for more and part of the FHFA focus is to work to stabilize communities hardest hit by foreclosures. To this end FHFA, working with the GSEs and the National Community Stabilization Trust, is launching a Neighborhood Stabilization Initiative with a pilot program in Detroit, Michigan. The Pilot will pursue pre-foreclosure and post-foreclosure strategies that include deeper loan modifications and partnering with nonprofits earlier in the REO sales process.
FHFA has decided not to further change the eligibility requirements for the Home Affordable Refinance Program (HARP) because it would not greatly impact the number of borrowers that could be served. Instead, FHFA will work to retarget outreach efforts to the approximately 750,000 borrowers who already quality and would financially benefit from refinancing.
FHFA's MAINTAIN goal also extends to Fannie Mae and Freddie Mac's multifamily loan purchases, Watt said, especially in light of the growing number of rental households and that housing affordability continues to be a significant concern for many households. While market competition is expected to result in lower multifamily lending for the GSEs, the Strategic Plan does not require that they prematurely shrink that footprint. It also provides additional capacity for affordable projects and that focus will include lending for smaller properties and for manufactured housing rental communities.
The second Strategic Goal is to REDUCE taxpayer risk by increasing the role of private capital in the mortgage market. The Director said this goal has been reformulated so it no longer involves specific steps to contract the GSEs' market presence, which could adversely impact liquidity but rather focuses on ways to scale back the GSEs' overall risk exposure. Meeting this goal includes having Fannie Mae and Freddie Mac conduct additional credit risk transfers for their single-family credit guarantee business and opening up private capital to share in credit losses, protecting taxpayers from bearing all of the potential losses.
The 2014 Scorecard requires each GSE to triple the amount of risk it transfers in 2014 from $30 billion of unpaid principal balance transfers last year to approximately $90 billion in 2014. Each GSE is also expected to try new risk transfer structures to assess sustainability in different market conditions.
The GSEs will also be required to continue to reduce their retained portfolios as mandated by their Senior Preferred Stock Purchase Agreements with the Treasury Department. The GSE's must reduce those portfolios to no more than $250 billion each by 2018 and FHFA is requiring them to develop plans to meet this target even under adverse market conditions. They must also prioritize selling their less liquid assets to reduce risk and take advantage of current investor interest.
FHFA is also requiring the companies to continue risk sharing with the private sector on multifamily purchases. Freddie Mac does this through a capital markets structure and Fannie Mae does through a risk sharing model.
Finally, another risk-reduction priority in 2014 involves private mortgage insurance counterparties. The crisis revealed severe weaknesses in this system and FHFA's objective is to ensure that private mortgage insurer counterparties to the GSEs are able to provide adequate credit loss protection in times of market stress.
The third goal, BUILD, relates to a new single family securitization infrastructure for use by the GSEs and which can be adapted for use by other secondary market participants. The core of this efforts is the Common Securitization Platform. FHFA's top objective with this platform, Watt said, was to make sure that it works for the GSEs. FHFA has identified the risks in transitioning to the platform and reviewed how to manage them. "We found that, because of the many variables involved," Watt said, "the main danger to the CSP effort would be pursuing too many objectives all at the same time." Any stumbles could ripple through the $10 trillion housing finance market so there is a lot at stake, thus the decision has been to "de-risk" the project.
All parties are working toward a seamless transition from the current in-house systems at each GSE to a future joint venture owned by them that operates one system with updated technology. This scope does not mean that the CSP efforts will be at odds with a future system or that building it will take place in a vacuum. "To the contrary, we are requiring that the CSP leverage the systems, software and standards used in the private sector wherever possible. This will ensure that the CSP will be adaptable for use by other secondary market actors - including private label securities issuers - when the future state is more defined." The second CSP objective is a single common security, which Watt says he believes will improve liquidity in the markets and would reduce costs, particularly to Freddie Mac whose securities have historically traded at a disadvantage compared to Fannie Mae's.
Watt said his agency's intent is to proceed with implementing the objectives of the Strategic Plan in a transparent way and with input from the public and stakeholders whenever possible. One example is the upcoming Request for Input on the guarantee fees charged by the GSEs. Watt said he had issued a directive that the GSEs delay the guarantee fee increase announced last December and the Request for Input will pose a number of questions the agency is considering and solicit and encourage feedback.
Watt said in his few months at FHFA he had been struck with the dedication and expertise of the FHFA staff and the tenacity and dedication of the employees of the GSEs. He said there had been a constant urgency present at all three places since the financial crisis and everyone had continued to excel at every step along the way.
He also singled out the work of his predecessor Edward J. DeMarco who served as acting director of FHFA since it was created in 2009 until Watt was confirmed. "In the face of the greatest economic collapse since the Great Depression, FHFA helped prevent an extremely bad situation from getting much worse. It's hard to imagine things being worse given the depth of the housing market collapse, but I very much believe that FHFA and Ed DeMarco's leadership prevented an even deeper financial collapse by stabilizing Fannie Mae and Freddie Mac.
Throughout his time at FHFA, Ed was instrumental in establishing the foundation for all that we will do going forward. So, while you may notice from my comments today certain changes in focus, you should know that I firmly believe we will be building on a very solid foundation," Watt said.