DeMarco Outlines Plan to Merge Fannie, Freddie into New Securitization Firm

by devteam March 5th, 2013 | Share

Edward J. DeMarco announced that the Federal Housing FinancernAgency plans to establish a new entity, independent of Fannie Mae and FreddiernMac (GSEs), to design and implement a new securitization platform for thernsecondary market.  The entity, initiallyrnowned and funded by the GSEs, it would have an independent CEO and Board ofrnDirectors and would be housed in a separate location from the two companies.</p

His announcement was made in a speech to member of thernNational Association of Business Economics in which the acting director of FHFArnlaid out the goals his agency has set for the two government sponsoredrnenterprises (GSEs) in 2013. </p

DeMarco told the economists that “there seemsrnto be broad consensusrnthat Fannie Mae and Freddie Mac will not return to their previous corporate forms.”   The Obama Administration has made clear thatrntheir preferred course of action is to wind down these government sponsoredrnenterprises (GSEs) and none of the proposed Congressional legislation envisions them exiting conservatorshiprnin their current corporaternform.  Recent changes in the GSEs’ agreement (PSPA)rnwith Treasury that replaced thernprevious 10 percent dividend with arnsweep of net income into Treasury means the GSEs will notrnbe building the capitalrnrequired to regain their former corporate status.</p

In the face of this uncertain future, FHFA, developed a 2012 StrategicrnPlan for its conservatorship which set forth three broad goals for the GSEs:</p

1.   Build a new infrastructure for the secondary mortgage market.</p

2.   Gradually contract the GSEs’ dominant presence in thernmarketplace while simplifying andrnshrinking their operations.</p

3.   Maintain</bforeclosure preventionrnactivities and creditrnavailability for new andrnrefinanced mortgages.</p

DeMarco said FHFA madernconsiderable progress toward these goals on the Conservators’ Scorecard itrndeveloped to focus the activities of the GSEs and said he was laying out its prioritiesrnfor executing the Strategic Plan in 2013.   </p

DeMarco startedrnwith the need, because of the GSEs’ uncertainrnfuture and a general desire for privaterncapital to re-enterrnthe market, to gradually contract the GSEs marketrnpresence over time.</p

Guarantee fees</bfor the GSEs were increased twice in 2012 to around 50 basis points which nearlyrndoubled the pre-conservatorship fee.  Thisrnwas not primarily to raise revenue but to bring credit risk pricing closerrnto what would be requiredrnbyrnprivate sector providers and at some point to encourage private capitalrnback into the market.  "We are notrnthere yet," DeMarco said, "but in conversations with market participants, I thinkrnwernare getting closer." rnFHFA also laid the groundwork in 2012 to meet goals of executingrnon risk sharing transactions. </p

The FHFA 2013rnScorecard has three priorities:</p<ul class="unIndentedList"<liA target for its singlernfamily credit guarantee business of $30 billion of unpaid principal balance inrncredit risk sharing transactions in 2013 for both GSEs and a requirement of using multiple typesrnof riskrnsharing transactions to meet the target. These transactions will allowrnFHFA to evaluate the pricingrnand the potential for furtherrnexecution in scale. FHFA also expectsrnto further increasernguarantee feesrnin 2013 and risk sharing transactions should provide valuablerninformation as to how closerncurrent guarantee fee pricing isrnto where privaterncapital would be willingrnto absorb creditrnrisk.
</li<liThe GSEs have a smaller marketrnshare of the multifamily market and there are otherrnproviders of credit in thatrnmarket. While the GSE share ofrnnew originations did increase duringrnthe financial downturn, itrnreturned to a more normal position in 2012. Each GSE's multifamily businessrnhas weatheredrnthe housing crisis and generated positiverncashrnflow and each GSE takes a different approachrnto these businesses whichrnembed some type of riskrnsharing. Givenrnthat the multifamily market'srnreliance on the GSEs has returned to a more normalrnrange, FHFA is setting a target of a 10rnpercentrnreductionrnin multifamily business volumernfrom 2012 level which is expected to be achievedrnthrough some combinationrnof increased pricing,rnmore limited product offerings,rnand tighterrnoverall underwriting standards.</li</ul<ul class="unIndentedList"<liThe GSEs' retained portfoliosrnhaverndeclined steadily since 2009 asrnrequired by the PSPAs. The composition of these portfolios hasrnalso changed significantly fromrnbeing dominated by the GSEs' own mortgage-backed securitiesrn(MBS) and performing whole loans. As those securities have been paidrndown, and as the needrnto work through delinquentrnloans increased,rnthe retained portfolios have become less liquid, thus FHFArnis setting a target of selling 5rnpercent of the lessrnliquid portion. In other wordsrntheir retained portfolios excludingrnagency securities. Thisrnadded requirement to sell from the lessrnliquid portions of their retained portfolios should lead to an even faster reductionrnthan is required under the PSPAs.</li</ul

The basic premise of the Buildrngoal is that the GSEs’ outmoded proprietary infrastructures needrnto bernupdated and maintained in such a way as to providernenhanced value to the mortgage market.  Theserninfrastructures arernnot the most effective whenrnit comesrnto adapting to market changes, issuingrnsecurities that attract private capital,rnaggregating data,rnor lowering barriers tornmarketrnentry.rn Anrnupdated infrastructure should also havernbenefits beyondrnthernGSE business model; operable across many platforms, so that it can be used by any issuer, servicer, agent,rnor other party thatrndecides to participate.</p

In a white paper issued last October FHFA raised the issue of the scope ofrnthe securitization platform.  One approach is tornfocus the platform on functions thatrnare routinely repeatedrnacrossrnthe secondary mortgage market, i.e. issuing securities, providing disclosures, paying investors,rnand disseminating data,rnwhere standardization couldrnhavernclear benefits to market participants.</p

The new entity announced byrnDeMarco to develop and implement the securitization platform will be designedrnto function like a market utility, asrnopposed to rebuilding the proprietaryrninfrastructures of thernGSEs and its functions are designedrnto operate as a replacement for some of thisrnlegacy infrastructure, however,rnthe overarching goal</bis to create something ofrnvalue that couldrneither be sold or usedrnbyrnpolicy makers asrna foundationalrnelement of the mortgage marketrnof the future.</p

The October whiternpaper also set out broad ideas for a model contractualrnframework which would identify areasrnwhere greater standardizationrnwould be valuable to the mortgage market of the future.  DeMarco said this is an optimal time to further consider how bestrnto address contractualrnshortcomings identified during the past few years. </p

Another aspectrnof the Build goal is the UniformrnMortgage DatarnProgram orrnUMDP. rnThe GSEs have workedrnthrough an industry process set up through MISMO – the Mortgage IndustryrnStandards Maintenance Organization — to movernthis process forwardrnand have developed a Uniform Loan Delivery Datasetrnand a Uniform Appraisal Dataset and begun work on the Uniform Mortgage Servicing Dataset.  Developingrnstandard terms, definitions, and industry standard data reporting protocols will decrease costsrnfor originators, servicers and appraisers andrnreduce repurchase risk.</p

Finally, FHFA seeks to make further progress onrnthe third strategic goal,rnmaintaining foreclosure preventionrnactivities,rnand promoting marketrnstability and liquidity to build on progressrnmade in 2012 with improvements to the Home Affordable Refinance Program and thernrepresentation and warranty framework which will eventually move thernprocess to more upfront monitoring.  </p

In 2013 FHFA place to enhance the post-delivery quality control practices and transparency associatedrnwith the new rep andrnwarranty frameworkrnand work to complete rep andrnwarranty demands for pre-conservatorship loan activity.</p

DeMarco said FHFA has a couple other prioritiesrnfor 2012.  One is to update master policies for private mortgage insurance and formulate eligibility standards. While this effort canrnbe looked at asrnmaintaining credit availability,rnit also seeks to strengthen andrnclarify standards to increase the reliability of this formrnof credit enhancementrnand help mortgage insurance remain arnviable risk transfer mechanismrnin the future.</p

There is also an effort to develop aligned standards for forced placedrninsurance. FHFA could have initiatedrnany of a variety ofrnGSE-centric approachesrnsuch as self-insurancernor developing otherrnstructures to obtain insurancernbut these would not have addressed how a future mortgage market without GSE’s would address force placedrninsurance.  Therefore FHFA plans tornbring together a range of stakeholders to analyze a way to set standardsrnmore broadly applicable to the mortgage marketrnand enable greaterrnregulatory coordination in an effort tornconsider the various issues associatedrnwith force placedrninsurance.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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