The Federal Housing Finance Agency (FHFA) has released its Strategic Plan for the years 2013-2017. The Plan builds on the one presented by FHFA Acting Director Edward J. DeMarco to Congress last February. FHFA is regulator of the Federal Home Loan Banks (FHLBanks) and was appointed regulator and conservator of Fannie Mae and Freddie Mac, the government sponsored housing enterprises (GSEs) in September 2008.
To ensure that the GSEs are safe and sound, FHFA, as regulator and conservator must identify and respond to their risks and take timely and appropriate supervisory actions to improve their conditions. FHFA does this through annual on-site examinations of each of the housing GSEs, off-site monitoring, targeted examinations of particular business operations, and focused program reviews, known as horizontal reviews.
While Fannie Mae and Freddie Mac are in conservatorship, their continued operations depend on capital infusions under an agreement with the U.S. Department of the Treasury. This agreement contributes to financial market stability but is not a long-term solution. Such government support for housing is not indefinitely sustainable. However, the form that the U.S. housing finance system will ultimately take is still uncertain and largely depends on actions taken by the Administration and Congress. While waiting for resolution of these policy questions, FHFA will pursue a series of initiates and strategies set forward in the plan.
The Strategic Plan sets forward four principal goals for the FHFA in its role as regulator of the Federal Home Loan Banks and conservator of Fannie Mae and Freddie Mac. While government sponsored enterprises (GSE) general refers to Fannie Mae and Freddie Mac, the term housing GSE in this paper refers to all three entities regulated by FHFA. The goals are:
- Safe and sound housing GSEs.
- Stability, liquidity, and access in housing finance.
- Preserve and conserve GSE assets.
- Prepare for the future of housing finance in the United States.
Each goal has a set of performance goals and a set of means and strategies. These are summarized here.
Strategic Goal 1 - Safe and sound housing GSEs has two performance goals:
- to identify risks and require timely remediation of weaknesses
- and to improve the condition of the regulated entities.
To that end, FHFA has identified the following steps.
Conduct annual examinations and targeted examinations as warranted and periodic special and horizontal reviews of the regulated entities which will identify existing and potential risks that could negatively affect each; evaluate the overall integrity and effectiveness of risk management systems and controls, and confirm compliance with laws and regulations.
The targeted examinations of will identify matters requiring the entities attention and will monitor their remediation and will communicate findings and recommendations to the entities' boards of directors and management. FHFA examiners will obtain a commitment from the board and management to correct weaknesses or deficiencies in a timely manner and will monitor remediation and verify the effectiveness of corrective actions.
In the case of severe deficiencies or where the entity is resistant to remediation, FHFA will pursue such an enforcement action as is appropriate. In the case of the conservatorships FHFA may use more direct means through its authorities to effect changes at the GSEs.
The GSEs operate in some markets characterized by uncertainty, volatility, and changing processes and practices. FHFA must respond to changing conditions, ensure the entities identify and manage existing and emerging risks, and adjust its supervisory strategies as appropriate to respond to market developments and identified risks.
As a result of legislation such as the Housing and Economic Recovery Act (HERA) and the Dodd-Frank Wall Street Reform Act (Dodd-Frank) FHFA has issued new or revised regulations and guidance which are finalized or in various states of completion. FHFA will complete the required rulemakings and develop additional regulations or guidance as needed to support stable housing finance and to achieve statutory objectives.
FHFA uses evaluations, examinations, and quality assurance reviews to assure compliance with effective policies of statutory mandates of personnel components such as compensation and incentives, supervision, training and development of staff
Certain FHLBanks have been subject to supervisory actions designed to improve risk management and preserve capital as they deal with troubled real estate-related investments, principally private-label mortgage-backed securities (MBS) issued from 2005 through 2008. FHFA requires any troubled FHLBank to improve its operations, preserve capital and build retained earnings to levels sufficient to support the par value of its capital stock.
Strategic Goal 2 - Stability, liquidity, and access in housing finance, has three performance goals:
- to promote stability and mitigate systemic risk that could lead to market instability,
- ensure liquidity in
- and expand access to housing finance for diverse financial institutions and qualified borrowers
FHFA has already increased the GSEs guarantee fees several times to better align them with market-rate risk-based pricing. The agency will explore more private-sector risk-sharing opportunities consistent with actions already taken to support a stable transition to greater private sector participation.
As discussions over the future of the housing finance system continue, FHFA will focus on promoting stability in housing markets through initiatives aimed at:
- Retaining value in the business operations of Fannie Mae and Freddie May;
- Encouraging these entities and the housing industry to adopt standards that stabilize the markets and promote stakeholder confidence;
- Home retention such as loan modifications, refinancing programs, and foreclosure alternatives including refinements to existing programs such as Home Affordable Refinancing (HARP) and Home Affordable Modifications (HAMP.)
- Developing with other agencies alternatives to dispose of properties owned (REO) by the housing GSEs.
The FHLBanks' core mission is to serve as a reliable source of liquidity for their member institutions in support of housing finance. FHFA will work to ensure that the FHLBanks continue to fulfill their statutory mission of providing liquidity to their members and that Freddie Mac and Fannie Mae, even though in conservatorships, will continue to serve as a reliable source of liquidity, principally through their mortgage securitization programs while FHFA works to reduce the level of government support.
Even in liquid markets, some qualified borrowers and financial institutions may face barriers to financing because of imperfect information, insufficient market activity, or inability to attract capital. FHFA is committed to ensuring that eligible borrowers and financial institutions including minority and women-owned institutions have fair and equitable access to finance and financial services offered by the housing GSEs and is committed to reducing barriers to the mortgage markets for qualified borrowers.
As a member of the Federal Housing Finance oversight Board (FSOC), FHFA will work to develop a robust housing market information system, monitor the regulated entities use of derivatives, help establish capital and margin requirements for swap transactions and, as stated above, actively promote home retention programs and initiatives and develop new approaches to disposing of GSE and FHA owned REO.
FHFA has implemented the affordable housing goals mandated by HERA by setting benchmarks based on the overall market and will oversee the FHLBanks' affordable housing programs.
Strategic Goal 3
- Preserving and conserving GSE assets has as its single performance goals, minimizing taxpayer losses during conservatorship.
To preserve and conserve GSE assets, FHFA will maintain programs and strategies that have begun to ensure ongoing mortgage credit availability, assist troubled homeowners and minimize taxpayer losses by working with the administration and with the GSEs to avoid borrower defaults and working with lenders and servicers to offer prudent loan refinancing and modification programs.
This will be accomplished by:
- Providing clear expectations to the GSE boards and managements for carrying out day to day operations and setting business objectives;
- Overseeing GSE staffing by hiring and retaining boards and CEOs and through them qualified management and staff.
- Promoting the revised HARP program.
- Implementing modification and refinancing initiatives and refining them as needed.
- Enhancing the use of short sales, deeds-in-lieu, and deed-for-lease options.
- Promoting prudent and appropriate underwriting of new business.
- Further aligning guarantee fees to risk.
- Promote risk-sharing. FHFA intends to evaluate different options in risk sharing between the GSEs and other market participants. This can help inform the GSEs about vulnerabilities in their g-fee pricing.
- Assess and resolve remaining reps and warranties repurchase requests pertaining to the pre-conservatorship book of business.
- Resolve outstanding claims involving private label MBS.
- Simplify business operations and risk management where possible by encouraging the GSEs to focus on their core business and mission and by identifying operations or business lines that should be shrunk or eliminated consistent with other strategic goals.
- Reduce the GSEs legacy portfolios through effective loss mitigation programs, monitoring market conditions, and identifying the near- and long-term effects of disposing of assets.
Strategic goal 4 - preparing for the future of housing finance in the US has as performance goals, building a new infrastructure for the secondary mortgage market and establishing standards that promote a safer and more efficient housing system and contracting GSE operations. These goals as they pertain to Freddie Mac and Fannie Mae and the means of obtaining them were laid out at great length in a white paper produced by FHFA last week. A summary of that paper can be found at here.
In identifying future roles for the FHLBanks, FHFA will seek to preserve and capitalize on their strengths as liquidity providers, particularly for community financial institutions and community development financial institutions and will evaluate ways in which the FHLBanks can support the transition to a more effective and efficient, liquid, safer and inclusive system of housing finance.
FHFA says that it faces a series of critical economic and environmental factors that could influence the agency's success achieving goals and objectives. Global economic factors and government policies, especially in China and Europe may affect the pricing of U.S. government debt and the benchmarks used to price private debt while external regulatory policies such as capital standards adopted by the Basel committee could dampen the demand for FHLBank products.
In past recessions, the housing sector served as a stimulus for economic recovery but that has not happened this time. Distressed sales, fears of future decline in house prices, and homebuyers' concerns about the strength of the economic recovery may continue to put downward pressure on house prices. Stabilization and recovery of housing markets will vary across markets and uncertainty could affect house prices for years to come.
The financial condition and performance of the GSEs and FHLBanks are heavily dependent on the performance of the U.S. housing and mortgage markets as well as general business and economic conditions. Persistent unemployment, weak economic growth, declines in real estate values, and adverse trends in mortgage lending pose significant challenges for the regulated entities. They are exposed to credit risks on loans and securities held in their portfolios or guaranteed by Freddie Mae and Fannie Mae; cyclical changes in the competitive landscape have adversely affected the FHLBanks' advances business. While they have a positive effect on funding costs, low interest rates have dampened revenues from interest-earning assets held by the housing GSEs.
When the Enterprises were placed in conservatorships in 2008, policymakers expected it to be a temporary measure to provide stability in the mortgage markets while they developed a new structure for housing finance. Legislation will likely change the structure and role of the housing GSEs, but given their financial condition and the terms their agreements with the Treasury, the GSEs are unlikely to earn their way back to emerging from conservatorship. FHFA will continue to focus its resources on initiatives to improve Enterprise operations that can enhance the functioning of financial markets during the conservatorships.