Recapping Recent Proposed Mortgage Rule Changes

There are five key issues confrontingrnthe Federal Housing Finance Agency (FHFA) its director told a banking audiencernon Monday.  The five, taken together, DirectorrnMel Watt said, address both of FHFA’s roles; conservator of the two governmentrnsponsored enterprises (GSEs) Freddie Mac and Fannie Mae and regulator of therntwo GSEs and the Federal Home Loan Banks. rn </p

Watt, speaking to the North CarolinarnBankers Association’s American Mortgage Conference, said his agency hasrnrequested public comment on all five of the issues and Monday was the deadlinernfor comments on the first two; guarantee fee levels for the GSEs and eligibilityrnrequirements for their private mortgage insurer counterparties.  </p

One of the first decisions he made asrnDirector, Watt said, was to suspend the increases in guarantee fees announcedrnlast December.  He believed that it wasrncritical to evaluate the fees and get feedback from stakeholders because of thernsignificant impact the increases could have on the GSEs, housing financernmarkets, and borrowers.  The request forrncomment asked for specific responses of how the fees affect various aspects ofrnthe mortgage market.</p

Another area on which FHFA has focusedrnhas been efforts to strengthen the GSE’s counterparty requirements for privaternmortgage insurers.  These PMI companiesrnhave always played an important role in meeting the statutory requirement thatrnborrowers with less than a 20 percent down payment have some private capitalrnstanding behind the loan to be eligible for GSE purchase.  The recent financial crisis made it clear thatrnit is critical to ensure PMI is available in both good times and bad. FHFA hasrndrafted new eligibility standards for these lenders is designed as a counterpartyrnrisk management tool for the GSEs.  </p

With the comment period on these twornissues ended, FHFA will review and consider responses, Watt said, andrnconsistent with FHFA’s statutory mandates, will assess and make policyrndecisions taking into account both safety and soundness considerations andrnpossible impacts on access to credit and housing finance market liquidity. rnWatt said that the inter-related nature of the two topics led FHFA to align therncomment periods but that the decisions on each would be separate.  </p

In August FHFA’s proposal for a SinglernSecurity structure for the GSEs was issued and comments requested as were proposedrnhousing goals for the GSEs for 2015 through 2017.  Last week the fifth issue, a proposed rule tornupdate and clarify certain aspects of Federal Home Loan Bank membershiprnrequirements was released for comment. </p

The Request for Input on the ProposedrnSingle Security Structure comes in the early stages of developing thatrnsecurity, Watt said, because FHFA wanted to facilitate robust discussions fromrnall stakeholders and the public.  Hernhighlighted four aspects of that structure.   </p

First, FHFA’s top priority in pursuing the Single Security is to deepen andrnstrengthen liquidity in the housing finance markets and getting it right willrnhave real world benefits for the markets and for borrowers.  An effectivernSingle Security will support a more liquid “to-be-announced” (TBA)rnmarket for mortgage-backed securities and can also further strengthen marketrnliquidity by reducing the trading disparities between Fannie Mae and FreddiernMac securities.   </p

Second, FHFA hopes to leverage the existing security structures used by the GSEsrnand avoid designing a structure from scratch. rnIn the proposal, the Single Security would use many of the securityrnfeatures in Fannie Mae MBS and the disclosure regime used by Freddie MacrnPCs.  </p

Third, FHFA’s proposal also focuses on the importance of making Fannie Maernand Freddie Mac’s existing securities equally interchangeable with the futurernSingle Security. Without this flexibility current market liquidity could bernimpacted.   Getting feedback on this approach is critical to thernSecurity’s success.   </p

The fourth point Watt touched on is the agency’s timing for developing thernSecurity.  He stressed that the Requestrnfor Input and the proposal are just the first steps in a multi-yearrnprocess.  The next step is to work withrnthe GSEs to process the feedback that is received.  FHFA, he said, will continue to producernupdates on both the Common Securitization Platform and the Single Securityrnwhere appropriate.</p

The last two areas involve FHFA as regulator.  The agency has proposed affordable housingrngoals for the GSEs for the next three years and the comment period on thatrnproposal remains open until the end of October. rnWatt said that challenges exist in today’s housing market that make itrndifficult for many lower-income families to access mortgage financing or tornfind an affordable apartment to rent. rnThe goals measure GSE mortgage purchases for both homeownership and thernprovision of affordable rental housing opportunities for these families.</p

For affordable single-family mortgages FHFA is asking for feedback on threernalternative ways to set these goals.  On the goals that address affordablernrental units in multifamily buildings, FHFA has asked for comments on creatingrna new category for small multifamily properties that have apartments affordablernto low-income families.  In recent years the GSEs have had limitedrnpurchases in this market segment which can be an important source of affordablernrental housing.   </p

Finally, last week FHFA released another proposed rulemaking involvingrnmembership requirements for the Federal Home Loan Banks (Banks) and this, Wattrnsaid, has generated significant discussion within the industry.   ThernBanks have a mission to support housing finance and it is FHFA’s role asrnRegulator to ensure they are doing so in a safe and sound manner that compliesrnwith their statutory requirements, Watt said.  To this end, FHFA hasrnproposed requiring Bank members to demonstrate ongoing mortgage lendingrnactivity instead of a one-time test used when an institution applies forrnmembership.  </p

In addition, FHFA has proposed clarifying the definition of insurancerncompany in such a way that captive insurers would no longer be eligible for Bankrnmembership.  While captive insurers may, in some cases, be involved inrnhousing finance, Watt said, their access to the Federal Home Loan Bank Systemrnraises a number of concerns that are discussed in the proposed rule.  </p

Watt concluded by saying that FHFA will consider the feedback received fromrnstakeholders as part of its further evaluation of these five policy areas.  Its evaluations and decision making willrncontinue to balance its mandates of ensuring safety and soundness and ensuringrnbroad liquidity in the housing finance markets.  â€