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FHFA Suggests Changes to Housing Finance Reform Bill

by devteam November 22nd, 2013 | Share

In preparedrnremarks to present to the Senate Banking Committee on Thursday, Alfred M.rnPollard, General Counsel of the Federal Housing Finance Agency (FHFA) explainedrnthe regulatory powers available to his agency and told the Senators both howrnthey differ from those available to its predecessor and what additionalrnauthorities are and will be needed.  Pollardrnhad been called before the committee specifically to address regulatoryrnauthority issues in relationship to the legislation proposed in Senate bill S.rn1217.  </p

FHFA wasrnestablished by the Housing and Economic Recovery Act ofrn2008 (HERA) to replace the Office of Federal Housing Enterprise Oversightrn(OFHEO), former regulator of the government sponsored enterprises (GSEs)rnFreddie Mac and Fannie Mae.  FHFA wasrnalso given supervisory authority over the 12 Federal Home Loan Banks (FHLBanks).</p

OFHEO did not have a full range of powers to regulate the GSEs, Pollardrnsaid.  It could not set capitalrnrequirements, undertake supervisory actions comparable to those of otherrnfinancial regulators, lacked receivership authority and relied on appropriations,rnsubjecting it to potential congressional budgetary disruptions. In addition,rnmuch had to be done with implied rather than explicit authorities.  HERA corrected most of these deficiencies inrncreating FHFA, but by the time the law was passed, Pollard said, it was toornlate to implement them prior to invoking conservatorship.</p

Pollard outlined a few of the basic regulatory tools FHFA has today.</p<ul class="unIndentedList"<liA full array of supervisory tools. FHFA has implemented these tools through tworndivisions, the Division of Enterprise Regulation (GSEs)rnand the Division of Bank Regulation (FHLBanks) and the Office of Finance. Both Divisionsrnconduct examinations and carry forwardrnprudential standards according to regulationsrnto ensure safety and soundness and compliance with laws and regulations.</li</ul

In conservatorship FHFA maintains arnpermanent on-site presence at the GSEs to conduct examinations and monitor businessrnactivities, key risksrnand compliance. FHFA typically carries out three on-siternexaminations per quarter of FHLBanksrnso that all twelve are examined on-siternonce per year in addition to an ongoing program of off-site monitoring. </p

FHFA has established comprehensivernexamination manuals as guides forrnexamination efforts, issues Advisory Bulletinsrnregarding key mattersrnsuch as credit riskrnmanagement and model riskrngovernance, and is the only financialrnregulator required to provide anrnannual report to Congress on its examination results.</p

As the conservatorshipsrnhave lasted far longer thanrnoriginally anticipated, FHFA hasrnresponded by developing an Officernof Conservatorship Operations and an Office ofrnStrategic Initiatives to coordinate and collaborate with the other divisions to help FHFA ensure the regulatedrnentities operate in a safe and sound manner. </p<ul class="unIndentedList"<liEnforcement. FHFA is empowered by statute to take a broad range ofrnenforcement actions includingrncease and desist orders, civilrnmoney penalties, debarmentrnof officials, and the abilityrnto act against institution-affiliatedrnparties.rnAdditionally, the Agency hasrncreated a process for suspending individualrnor corporate counterparties found guilty of criminal law violations. </li</ul<ul class="unIndentedList"<liEmergency Tools. While FHFA does not have a fund such as Deposit Insurance Fund to coverrnlosses it does maintain a working capital fundrnand has the ability to impose special assessmentsrnon the GSEs and FHLBanks to address any shortfalls in its resources in order tornrespond to emergency situations. </li</ul

Several court decisions have roundedrnout FHFA authorities, Pollard said. rnSignificantly in a case in the Southern District of New York, the Court found not only that FHFA had examinationrnprivilege, but also sharedrnsimilar authorities to bankingrnregulators.  Thisrnboth solidified the examination privilege and made clear that FHFA supervisory actions find support in long-standing bankrnregulatory powers.  </p

Pollard said that in sum, the agency is equipped tornmeet the mission Congress hasrnset for it and he turned to address the regulatory structurernset forth in S. 1217, andrnwhat areas exist for improvement in terms ofrnregulatory structure and powers. The bill would establish a new model for the secondary mortgage market and a new supervisory agency,rnthe Federal Mortgage Insurance Corporation (FMIC).  This would representrna move from traditional examination- and enforcement-basedrnsupervision to a multi-faceted construct covering availability andrntransparency of information, standard-setting tornenter and participate in the market,rnsupervision of participants, access to credit and the secondary mortgage market, insurance of securities and establishment and operationrnof databases including a mortgage data repository.  </p

Implementation of the bill’s varied elements will require careful thought andrnappropriate transitional steps over a five-year period and, Pollard said, as wernlearned during the financial crisis  evenrnwith adequate powers, regulators will not always getrnit right. rnIf taxpayers are going to be at risk of loss, there must be sufficientrnprivate capital out front. </p

The bill provides FMIC withrnlimited explicit regulatory authority,rnthough additional tools may bernimplied and, importantly, an “incidental powers”rnprovision is set forth. rnBut clear and explicit regulator authority including to establish prudential standards,rnset capital requirements and take enforcementrnactions would enhance market stability andrnprovide a higher degreernof confidence to all marketrnparticipants, limit litigation, and betterrninsure consistent outcomes.  Reliance onrnimplied authority, Pollardrnexplained, also makes it difficultrnto say what is missing.  </p

FMIC needs fullrnauthorities including the authority to setrncapital standards, request reportsrnfrom and examine market participants, establish enforceable prudential standards, require participants to undertakernremedial actions where appropriate and impose penalties for bad behavior and bad actors.  He outlined for the committee examples fromrnFHFA on how the language of S. 1217 regarding powers could be made clearer andrnmore explicit. He also advocated forrngreater sharing of supervisory information and greater cooperation amongrnregulators. </p

Therernare two important questions about the way S. 1217 sets a new direction for thernhousing finance market; does the legislation get the right structural pieces inrnplace for the new market to function well?  Does it provide for an effective transition fromrnthe current to the new system?  Pollardrnsaid FHFA has identified areas where these questions could be better answered. </p

For example, S. 1217 authorizes consultationrnand coordination with other agencies that may already be supervising likely participantsrnin the new market, but more couldrnbe done to ensure that other regulators share information with FMIC and thatrnexams are coordinated.  FMIC and FHFA’s rolesrnin the Financial Stability OversightrnCouncil should be clarifiedrnto ensure that during marketrntransition appropriate representation remainsrnin place and FMIC should have anrnappropriate and defined role in thernFederal Financial Institutions Examination Council.</p

There may also be gaps tornbe filled such as a possible omission ofrnnon-bank mortgage servicers from supervision. rnAssigning regulatory oversightrnto FMICrnwith the ability to setrnand enforce prudential requirementsrncould help fill this gap.  Additionally, FHFA hasrnseen certain state andrnlocal laws that may impairrnefficient operation of arnnational secondary mortgage market.</p

FMIC is designed to be funded exclusively by insurancernfees on mortgage-backed securities.rnRelying exclusively on fees, particularly asrnthe new market is developing,rnmayrnpresent certain challenges and at its inception, FMIC should be insured adequate resources.   In addition, Funding FMIC and growing therninsurance reserve could require rather large insurance fees in the early years and in timesrnof marketrndistress revenues could droprnsubstantially.  Perhaps FMIC’s sourcesrnof funding could be expanded to include other fees and assessments such as creating applicationrnfees and restoring assessments on the FHLBanks for theirrnsupervision.</p

The transition will involve a simultaneous wind-down of the GSEs, the transfer of functionsrnand employees from FHFA tornFMIC, and the hiring of additional staff at the new agency. S.rn1217 establishes a two-step transition that wouldrnhave FHFA and FMICrnco-exist for five years,rnwhich could be confusing andrninefficient for both market participants and agency employees.  FHFA’s experience from the transition fromrnOFHEO would argue in favor of immediately transferring all FHFArnpersonnel and responsibilities to FMIC andrnmaintaining the congressional direction to wind downrnFannie Mae and FreddiernMac.  </p

In particular,rnmoving all employees to the new agency – or, possibly, renaming and empowering FHFA as FMIC -avoids issues of dispersionrnof resources and expertise. rnAlso guidance would be helpful on the legal authority of FMIC’s Director to act before the Board is fully constituted.  Funding in transition may be critical to assure that a smooth start forrnFMIC occurs with a solid capitalized reserve fund, systemsrnandrntechnology in place and providing resourcesrnto address challenges not anticipatedrnat this time.</p

While work continues on the Common Securitization Platform andrnmoves to develop more fully the National Mortgage Database, Pollardrnsuggests that it may be beneficial to also look at a nationalrnnote repository which could bring benefitsrnto homeowners, lenders, the state foreclosure process andrnefforts of groups such as thernUniform Law Commission to make more uniform state foreclosure laws.

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About the Author

devteam

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

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