FHFA Outlines Remainder of GSE Strategic Plan

by devteam October 10th, 2012 | Share

The FederalrnHousing Finance Agency (FHFA) has released its Strategic Plan for the yearsrn2013-2017.  The Plan builds on the onernpresented by FHFA Acting Director Edward J. DeMarco to Congress last February.   FHFArnis regulator of the Federal Home Loan Banks (FHLBanks) and was appointed regulatorrnand conservator of Fannie Mae and Freddie Mac, the government sponsored housingrnenterprises (GSEs) in September 2008.  </p

To ensure that the GSEs are safe and sound,rnFHFA, as regulator and conservatorrnmust identify and respondrnto their risks and take timely and appropriaternsupervisory actionsrnto improve their conditions. FHFA doesrnthis through annualrnon-site examinations of eachrnof the housing GSEs, off-site monitoring, targeted examinations of particular businessrnoperations, andrnfocused program reviews, known as horizontalrnreviews.</p

While FanniernMae and Freddie Mac are inrnconservatorship, theirrncontinued operations depend on capitalrninfusions under an agreement with the U.S. Department of thernTreasury.   This agreement contributesrnto financial market stability butrnis not a long-term solution. Suchrngovernment support for housing isrnnot indefinitely sustainable.   However, the form that the U.S. housingrnfinance system will ultimately take is still uncertain and largely depends onrnactions taken by the Administration and Congress.  While waiting for resolution of these policyrnquestions, FHFA will pursue a series of initiates and strategies set forward inrnthe plan.</p

The StrategicrnPlan sets forward four principal goals for the FHFA in its role as regulator ofrnthe Federal Home Loan Banks and conservator of Fannie Mae and Freddie Mac.  While government sponsored enterprises (GSE)rngeneral refers to Fannie Mae and Freddie Mac, the term housing GSE in thisrnpaper refers to all three entities regulated by FHFA.   The goals are:</p<ol

  • Safe and sound housing GSEs.</li
  • Stability, liquidity, and access inrnhousing finance.</li
  • Preservernand conserve GSE assets.</li
  • Preparernfor the future of housing finance in the UnitedrnStates.</li</ol

    Each goal has a set of performance goals and a set of meansrnand strategies.  These are summarized here.</p

    Strategic Goal 1 – Safe and sound housing GSEs has two performancerngoals:</p<ol

  • to identify risks andrnrequire timely remediationrnof weaknesses </li
  • and to improve therncondition ofrnthe regulatedrnentities.  </li</ol

    To that end, FHFA has identified thernfollowing steps.</p

    Conduct annual examinations andrntargeted examinationsrnas warranted and periodic special and horizontal reviewsrnof the regulated entitiesrnwhich will identify existing and potential risks that could negatively affect each;rnevaluate the overall integrity and effectiveness of risk management systems andrncontrols, and confirm compliance with laws and regulations.</p

    The targeted examinationsrnof will identify matters requiring the entities attention and will monitorrntheir remediation and will communicate findings and recommendations to thernentities’ boards of directors and management. rnFHFA examinersrnwill obtain a commitment fromrnthe board and management to correct weaknesses orrndeficiencies in a timely manner andrnwill monitor remediationrnandrnverify the effectiveness ofrncorrective actions.</p

    In the case of severe deficiencies orrnwhere the entity isrnresistant to remediation,rnFHFArnwillrnpursue such an enforcementrnaction as isrnappropriate.  In the case of thernconservatorships FHFA may usernmorerndirect means throughrnitsrnauthorities to effectrnchanges at the GSEs. </p

    The GSEsrnoperate in some marketsrncharacterized by uncertainty, volatility,rnand changingrnprocesses andrnpractices.  FHFArnmust respond to changingrnconditions, ensurernthe entities identify and manage existing andrnemergingrnrisks, and adjust itsrnsupervisory strategies asrnappropriate to respond to market developmentsrnand identified risks.</p

    As a result of legislation such as the Housing and EconomicrnRecovery Act (HERA) and the Dodd-Frank Wall Street Reform Act (Dodd-Frank) FHFArnhas issued new or revised regulations and guidance which are finalized or inrnvarious states of completion.  FHFA willrncomplete the required rulemakings and develop additional regulations orrnguidance as needed to support stable housing finance and to achieve statutoryrnobjectives. </p

    FHFA uses evaluations, examinations, and quality assurancernreviews to assure compliance with effective policies of statutory mandates ofrnpersonnel components such as compensation and incentives, supervision, trainingrnand development of staff  </p

    Certain FHLBanks have been subjectrnto supervisory actionsrndesignedrnto improve risk managementrnand preserverncapital as they dealrnwith troubled real estate-relatedrninvestments, principally private-label mortgage-backedrnsecurities (MBS) issued fromrn2005 through 2008. FHFA requires any troubled FHLBank tornimprove itsrnoperations, preserve capitalrnand build retained earnings to levels sufficient tornsupport the par value of itsrncapital stock.</p

    Strategic Goal 2 -</bStability,  liquidity, and access inrnhousing finance, has three performance goals: </p<ol

  • to promote stability and mitigaternsystemic risk that could lead to market instability,</li
  • ensure liquidity inrnmortgage markets,
  • and expand access to housing finance for diversernfinancial institutions and qualifiedrnborrowers</li</ol

    FHFArnhas already increased the GSEs guarantee fees several times to better align themrnwith market-rate risk-based pricing.  Thernagency will explore more private-sector risk-sharing opportunities consistentrnwith actions already taken to support a stable transition to greater privaternsector participation.</p

    Asrndiscussions over the future of the housing finance system continue, FHFA willrnfocus on promoting stability in housing markets through initiatives aimed at:</p<ul class="unIndentedList"<liRetainingrnvalue in the business operations of Fannie Mae and Freddie May;</li<liEncouragingrnthese entities and the housing industry to adopt standards that stabilize thernmarkets and promote stakeholder confidence;</li<liHomernretention such as loan modifications, refinancing programs, and foreclosurernalternatives including refinements to existing programs such as Home AffordablernRefinancing (HARP) and Home Affordable Modifications (HAMP.)</li<liDevelopingrnwith other agencies alternatives to dispose of properties owned (REO) by thernhousing GSEs.</li</ul

    The FHLBanks’rncore mission is to serve as a reliablernsource of liquidity forrntheir member institutionsrnin support of housing finance. FHFA will workrnto ensurernthat the FHLBanks continue tornfulfill their statutory mission of providing liquidity torntheirrnmembers and that Freddie Mac andrnFannie Mae, even though in conservatorships, will continue to serve as arnreliable source of liquidity, principally through their mortgage securitizationrnprograms while FHFA works to reduce the level of government support.</p

    Even in liquid markets,rnsome qualified borrowers andrnfinancial institutions may face barriers to financing becausernof imperfectrninformation, insufficient marketrnactivity, or inability to attractrncapital.  FHFArnis committed to ensuring thatrneligiblernborrowers and financial institutions including minority and women-ownedrninstitutions have fair andrnequitable access tornfinance and financialrnservices offeredrnbyrnthe housing GSEs and is committed to reducing barriersrnto the mortgage markets for qualified borrowers.</p

    As a member of the Federal Housing Finance oversight Boardrn(FSOC), FHFA will work to develop a robust housing market information system,rnmonitor the regulated entities use of derivatives, help establish capital andrnmargin requirements for swap transactions and, as stated above, activelyrnpromote home retention programs and initiatives and develop new approaches torndisposing of GSE and FHA owned REO.</p

    FHFA hasrnimplemented the affordable housingrngoalsrnmandatedrnbyrnHERA by setting benchmarksrnbased on the overall market and will oversee the FHLBanks’rnaffordable housing programs.   </p

    Strategic Goal 3 </p<ol

  • Preserving andrnconserving GSE assets has as its single performance goals, minimizing taxpayerrnlosses during conservatorship.</li</ol

    To preserve and conserve GSE assets, FHFA willrnmaintain programs and strategies that have begun to ensure ongoing mortgagerncredit availability, assist troubled homeowners and minimize taxpayer losses byrnworking with the administration and with the GSEs to avoid borrower defaultsrnand working with lenders and servicers to offer prudent loan refinancing and modificationrnprograms.  </p

    This willrnbe accomplished by: </p<ul class="unIndentedList"

  • Providing clear expectations to the GSE boardsrnand managements for carrying out day to day operations and setting businessrnobjectives;</li
  • Overseeing GSE staffing by hiring and retainingrnboards and CEOs and through them qualified management and staff.</li
  • Promoting the revised HARP program.</li
  • Implementing modification and refinancingrninitiatives and refining them as needed.</li
  • Enhancing the use of short sales,rndeeds-in-lieu, and deed-for-lease options.</li
  • Promoting prudent and appropriate underwritingrnof new business.</li
  • Further aligning guarantee fees to risk.</li
  • Promote risk-sharing. FHFA intends to evaluate different options inrnrisk sharing between the GSEs and other market participants. This can help inform the GSEs aboutrnvulnerabilities in their g-fee pricing. </li
  • Assess and resolve remaining reps andrnwarranties repurchase requests pertaining to the pre-conservatorship book ofrnbusiness. </li
  • Resolve outstanding claims involving privaternlabel MBS.</li
  • Simplify business operations and riskrnmanagement where possible by encouraging the GSEs to focus on their corernbusiness and mission and by identifying operations or business lines thatrnshould be shrunk or eliminated consistent with other strategic goals.</li<liReduce thernGSEs legacy portfolios through effective loss mitigation programs, monitoringrnmarket conditions, and identifying the near- and long-term effects of disposingrnof assets. </li</ul


    Strategicrngoal 4 – preparing for the future of housing finance in the US has as performancerngoals, building a new infrastructure for the secondary mortgage market andrnestablishing standards that promote a safer and more efficient housing systemrnand contracting GSE operations.  Theserngoals as they pertain to Freddie Mac and Fannie Mae and the means of obtainingrnthem were laid out at great length in a white paper produced by FHFA lastrnweek.  A summary of that paper can bernfound at here.  </p

    Inrnidentifyingrnfuture roles for the FHLBanks, FHFArnwill seekrnto preserve and capitalize onrntheir strengths asrnliquidity providers,rnparticularly forrncommunity financial institutions and community development financial institutions andrnwill evaluaternways in which the FHLBanksrncan support the transition to a morerneffective and efficient, liquid,rnsafer and inclusive system of housing finance.</p

    FHFArnsays that it facesrna seriesrnof critical economic andrnenvironmentalrnfactors that could influencernthe agency’s success achieving goals and objectives. Global economic factors and government policies,rnespecially in China and Europe may affect the pricing of U.S. government debt andrnthe benchmarks used to price private debt while external regulatory policiesrnsuch as capital standards adopted by the Basel committee could dampen the demandrnfor FHLBank products.  </p

    Inrnpastrnrecessions,rnthe housing sectorrnserved asrna stimulus forrneconomic recovery but that has not happened this time.  Distressed sales,rnfearsrnof future decline inrnhouse prices, and homebuyers’ concerns aboutrnthe strength of therneconomic recovery may continue to putrndownward pressure on housernprices. Stabilizationrnand recovery of housing markets will vary across marketsrnand uncertainty could affect housernprices for years to come.</p

    The financial condition and performance of the GSEs andrnFHLBanks are heavily dependent on the performance of the U.S. housing andrnmortgage markets as well as general business and economic conditions.  Persistent unemployment, weak economicrngrowth, declines in real estate values, and adverse trends in mortgage lendingrnpose significant challenges for the regulated entities.  They are exposed to credit risks on loans andrnsecurities held in their portfolios or guaranteed by Freddie Mae and Fannie Mae;rncyclical changes in the competitive landscape have adversely affected thernFHLBanks’ advances business.  While they have a positiverneffectrnon funding costs, low interest ratesrnhave dampened revenues fromrninterest-earning assetsrnheld by the housing GSEs. </p

    When the Enterprisesrnwerernplaced in conservatorships in 2008, policymakers expectedrnit to be a temporary measure tornprovide stability inrnthernmortgage marketsrnwhile they developedrna new structure for housing finance. Legislation will likely change thernstructure andrnrole of the housing GSEs, but given their financialrncondition and the terms their agreements with the Treasury,rnthe GSEs are unlikely to earnrntheir way backrnto emerging from conservatorship. FHFArnwill continue tornfocus its resources on initiativesrnto improve Enterprisernoperationsrnthat can enhance thernfunctioning of financial markets during the conservatorships.

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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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