FHFA Says Significant Progress Made toward Strategic GSE Goals

The Federal Housing Finance Agency (FHFA) recently released its 2013 Conservatorship Scorecard detailingrnthe progress made by the government sponsored agencies (GSEs) Freddie Mac andrnFannie Mae in meeting the strategic goals set for them so far this year under FHFA’srn2012 Strategic Plan.  The plan sets forth three principal goals forrnthe current phase of the GSE conservatorship:</p

1.     rnBuildrna new infrastructure for the secondary mortgagernmarket;</p

2.     rnGraduallyrncontract the Enterprises’ dominant presence in the marketplace while simplifying and shrinking their operations; and</p

3.     rnMaintain foreclosure prevention activities and credit availability for new and refinanced mortgages.</p

Reductionrnof the governments risk in the single-family mortgage credit market requiresrngiving investors greater certainty and confidence in the rules, policies, data,rnand disclosures used in mortgage securitization.  In order to build a new infrastructure for single-family mortgage securitization thernGSEs need to develop a model Contractualrnand Disclosure Framework (CDF)rnthat will help foster that certainty and confidence.</p

ThernGSEs made significant progress toward achieving interim goals in developingrnthat framework.  A joint GSE team hasrnanalyzed and compared certain policies and practices relating to fullyrnguaranteed mortgage-backed securities (MBS) while noting comparable practicesrnin the private-label market.  By year-endrn2013 the team will recommend waysrnto align the GSEs’ policies and practices in each area. The team has focused on identifying best practices for non-guaranteedrnMBS, including those partially guaranteed by the GSEs and has begun a review and analysis ofrndifferences in the GSEs’ Master Trust Agreements.  </p

Thernsecond major element of the new infrastructurernfor single-family mortgage securitization being developed isrnthe Common Securitization Platform (CSP) which will consist of integratedrnhardware architecture and software applicationsrnthat the GSEs and eventually other, fully private firmsrnwill be able to use to perform majorrnaspects of the securitization process. </p

FHFA and the GSEs have made significantrnprogress toward achieving each of these goals.rnAchievement of the longer-term objectives of the CSP remains a significant undertaking, as implementation of the platformrnencompasses both a complex technology project and significant changesrnin Enterprise business processes. Progress made by the GSEs and FHFArnthus far include:</p<ul class="unIndentedList"<liFormationrnof a GSE joint venture business entity, Common Securitization Solutions, LLC (CSS). CSS will own the CSP andrnrelated business and operationalrnfunctions.rnAn executive search for an independent Chairperson of the Board of Managers and Chief Executive Officer whornwill govern the corporation is well underway</li<liCommercialrnoffice space has been leased for a period of three years for CSS in Bethesda,rnMaryland. Next year staff, provided uprnto now by the GSEs, will transition to being independent from them and willrnmove into the new building. </li<liFHFA andrnthe 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 profitsrnand losses, the structure of thernBoard of Managers, voting rights, identification of "significant matters" requiring super-majority voting, and the handling of intellectual property rights.rn</li<liThernteam building the platform has made significant progressrnon developing the design,rnscope, and functional requirementsrnfor thernfive CSP's modules which will perform the data validation,rnsecurity 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 milestonesrnin the development and testing of the platform,rnall in a non-production environment.</li<liInrnaddition to the continued work on the platform'srncore processing software, the CSP team and Enterprise staff have been working on other critical business operationsrnincluding the development of detailed diagrams of business processes and data flows and the testing of completedrnsoftware. </li</ul

Underrnthe Uniform Mortgage Data Program (UMDP) the GSEs are collaborating withrnindustry to develop uniform data standards for single-family mortgages.  Data standardization will allow all types ofrnlenders to participate in the secondary market and make it far easier andrncheaper for them to acquire technology from third-party venders.  The GSEs have implemented three key phases ofrnUMDP, the Uniform Appraisal Dataset, the Uniform Collateral Data Portal, andrnthe Uniform Loan Delivery Dataset.  InrnSeptember each GSE submitted white papers to FHFA that address strategies forrndata standardization, collection, and use under the three initiatives.</p

EachrnGSE has been working to develop and execute transactions that transferrnsingle-family mortgage credit risk to private investors and each has executedrnmultiple transactions totaling more than $40 billion after first issuingrnhistorical data on the credit performance of relevant mortgages.  Freddie Mac has sold two offerings of a newrndebt security backed by reference pools of 30-year fixed-rate mortgages and inrnOctober Fannie Mae a sold a similar type of debt security.  In addition both GSEs have executedrntransactions to transfer credit risk on pools of mortgages to private insurancerncompanies.  </p

Under revisions made in 2012 to the Senior Preferred StockrnPurchase Agreements (PSPAs) between the GSEs and Department of the Treasury thernGSEs have had to accelerate the contraction of their retained mortgagernportfolios.  For 2013 the PSPA requires that each retainedrnportfolio decline to $553 billion. As of the date of this ProgressrnReport, each Enterprise’s retained portfoliornwas less than that amount.</p

As a resultrnof the reductions in the retained portfolios made pursuant to the PSPAs and GSE purchases of delinquent mortgages from pools backing guaranteedrnMBS, the portfolios are increasingly concentrated in less liquidrnassets.  The 2013 Scorecard set arngoal for each GSE to reduce these portions of the portfolio by 5 percent eachrnyear.  As of the date of this progressrnreport, each has achieved the 2013 scorecard objective, Fannie Mae by selling at least $21 billionrnand Freddie Mac by selling at least $15.7 billionrnof less liquid assets.</p

The 2013 Scorecard establishedrnthe expectation that each GSE would reduce the unpaid principal balance of its new multifamily business byrnat least 10 percent relative to 2012rnthrough various means such as tightening underwriting, adjustingrnpricing, or limiting product offerings, but could not increase the proportion of credit risk retained by the Enterprises. Each Enterprise has taken stepsrnto meet this goal, andrnthe market appears to have absorbedrnthe changes in business volumesrnwithout major disruption.</p

Significant changes to the Home Affordable Refinance Programrn(HARP) in late 2011 led to a surge inrnprogram activity throughout 2012 that resultedrnin more than a million HARP refinances for that year,rnan amount equal tornactivity over the priorrnthree years. As of August 2013, HARP refinances sincernprogram inception totaled more than 2.8 million.  FHFA estimates that as many as 1 million more borrowers are HARP-eligible and isrntaking steps to reach those borrowers.</p

FHFA and the GSEs initiated the Servicing AlignmentrnInitiative (SAI) in April 2011.  It establishedrnconsistent mortgage loan servicing and delinquency management requirements acrossrnthe two GSEs including policies related to borrower contact, delinquency management, loan modifications, servicer incentives,rnand compensatory fees. In 2013, FHFA and the Enterprises announced additional enhancements to the program:</p<ul class="unIndentedList"<liArnStreamlined Modification initiative that initiative allows servicers to solicit certain eligible borrowers who are delinquentrnbetween 90 to 720 days with reduced documentationrnrequirements. </li<liChanges to the servicer incentives framework, eliminating the borrower response package incentives and related performance benchmarks and increasing thernmodification incentive structure under the Home Affordable Modification Program (HAMP) by $500.00.</li<liExtensionrnof 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. ThernEnterprises also extended thernStreamlined Modification initiative to December 2015 to correspond to thernHAMP sunset date.</li<liIssuancernof servicing requirements in responsernto the Consumer FinancialrnProtection Bureau's final rule relatingrnto early intervention and communication withrndelinquent borrowers, alternatives to foreclosure and right ofrnappeals, foreclosure referral and foreclosure suspension, and error resolution.</li</ul

Achieving the objective ofrnmaintaining credit availability for new and refinanced mortgages requires a viablernprivate mortgage insurance (MI) industryrnto provide credit enhancement forrnloans with loan-to-value ratios overrn80 percent.  The 2013 Scorecard established the expectation that the GSEs would update and align counterparty risk management standards for mortgagerninsurers, including uniform master policies and aligned eligibilityrnrequirements.</p

FHFA and the GSEs have madernconsiderable progress toward developing the new MI master policies andrneligibility 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 tornstate insurance regulators for approval. The newrnmaster policies are scheduled to take effect in mid-2014. FHFA expects to solicit public feedback onrnproposed new MI eligibility requirementsrnby the end of 2013.</p

The 2013rnScorecard required each GSE complete its review of pre-conservatorship loanrnacquisitions and complete demands for repurchase or restitution for breaches ofrnrepresentations and warranties.  Usingrntwo methods, expanding existing capacities to conduct loan-by-loan file reviewsrnand pursuing global settlements, the GSEs have resolved disputes with 10rnlending institutions and has recovered more than $18 billion in lender paymentsrnso far this year.</p

“These accomplishments represent important steps that are helpingrnto bringrnstability and liquidityrnto the housing marketrnwhile also laying the foundationrnforrna future, post- conservatorship housing finance system,” said FHFA Acting Director EdwardrnJ. DeMarco. “Muchrnmore remains to be done and our work will continue while lawmakers decide a future course.”

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