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Treasury Official Throws Cold Water on Fannie/Freddie Optimism, HARP Extension

by devteam January 23rd, 2014 | Share

A Treasury Department official saidrntoday that despite arguments that Fannie Mae and Freddie Mac (the GSEs) arernfinancially flush and that, with the confirmation of Mel Watt as Director ofrnthe Federal Housing Finance Agency (FHFA) the administration can now accomplishrnits goals without the help of Congress, it is critical to continue the pursuitrnof comprehensive housing finance reform. rn</p

Secretary for Housing FinancernPolicy Dr. Michael Stegman told a meeting of the ABS Structured Finance Industry Group many of the structural flawsrnof the legacy GSE-centric mortgage finance system have not been fixed.  Indefinitely continuing a taxpayer-backedrnduopoly is neither sustainable nor sensible public policy.</p

First, the GSEs might not be that flush.  He said that recent quarterly results may “significantly overstate the true financial conditionrnof the enterprises, especially on a go-forward basis.”  Some recent income has resulted from one-timerntax reversals, releases of loan loss reserves, or settlements of legacyrnsecurities litigation.  Excluding these,rnin the first three quarters of 2013 more than 60 percent of the GSEs’ combinedrnincome was from their retained investment portfolios which they are required tornsteadily shrink under their agreements with Treasury.  They have also benefited significantly</bfrom strong home-price appreciation and low interest rates, both of which mayrnmoderate in future periods.  </p

Further, he said, keeping the GSEs in a conservatorshiprndesigned by emergency legislation is not the best way to operate over the longrnterm and continued uncertainty about their future will continue to impedernaccess to credit.  Thus comprehensivernhousing finance reform remains a top Administration priority.</p

Stegman said the President has outlined his objectives forrnthat reform; require private capital to play the dominant role in providingrnmortgage credit; ensure creditworthy borrowers have broad access to safe andrnresponsible mortgages; put in place strong safeguards to protect taxpayers; andrnhelp ensure access to affordable rental options for middle class families andrnthose who are working toward joining the middle class.  The following are priorities.</p<ul class="unIndentedList"<liPreserving a deep and liquid TBArnmarket. A catastrophic governmentrnguarantee of qualified mortgage backed securities (MBS) standing behindrnsubstantial private capital in a first loss position is critical to maintainingrnmarket liquidity and preserving broad access to the 30-year fixed rate mortgage. GSEs' legacy securities must have arncomparable guarantee.</li</ul

A good first step toward this would be to reduce the pricerngap between Freddie Mac’s securities and Fannie Mae’s by linking them.  This would reduce the cost to taxpayers andrnimprove liquidity in the TBA market.</p<ul

  • The holding or syndicating of creditrnrisk should be separated from the act of securitizing mortgages. This would help prevent entities holdingrncredit risk from becoming too important to fail because they also control the infrastructurernneeded to create securities. It wouldrnalso lower the barriers to entry. “Ourrnpreference would be that all single-family mortgages that receive arngovernment-backed wrap be securitized through a single, non-profitrnsecuritization utility that would issue standardized mortgage backedrnsecurities.” </li</ul<ul class="unIndentedList"</ul<ul class="unIndentedList"<liTo attract significant privaterncapital to take credit risk, the regulator should be able to approve variousrnforms of first loss as long as they meet specified criteria. Allowing different types of first lossrnmechanisms can help attract a wide source of private capital to take creditrnrisk. </li</ul

    There are two phases of the mortgagerncredit cycle in which alignment of interest issues arise between the firstrnloss-taker and the government: (1) when mortgage pools are formed; and, (2)rnthroughout life of the loan.  Therninterests of the Guarantor entity and the government are powerfully aligned whererna well-capitalized guarantor is responsible for paying all credit losses on arngiven pool and the government guarantee is triggered only when all of itsrncapital is exhausted. </p<ul

  •  Creditworthy borrowers in allrngeographies, and with varying income levels, must have access to the system. All originators, guarantors, and aggregators withinrna government guaranteed system will be required to provide mortgage credit on anrnequitable and non-exclusionary basis with a strong independent regulator availablernto enforce compliance.</li</ul<ul class="unIndentedList"</ul<ul class="unIndentedList"<liThe future system must providernliquidity to the rental market. The new system should have many morernparticipants and be more competitive than the current marketplace, where the GSEsrndominate. Stegman says the Administration supports repeal of GSE affordablernhousing goals but would incorporate affordability standards for multifamilyrnhousing into the new system. </li</ul<ul class="unIndentedList"<liThe new system should include arnnational mortgage database. The recoveryrnwas hampered by the low quality and idiosyncratic coverage of mortgage datarnsuch as information to assess risk or to identify and link senior and juniorrnliens. A comprehensive database coveringrnresidential loans and liens would be a significant step to improve these datarnfailures. </li</ul<ul class="unIndentedList"<liThe transition must be done in a wayrnthat does not disrupt liquidity and access to credit and will take time, atrnleast five years. In the lead up to a successful transition, the GSEs shouldrnramp up their risk sharing transactions, and make strong progress on theirrnCommon Securitization Platform, since a single securitization utility isrncentral to the future system. The Administrations also wants to see a number ofrnnew guarantors during the transition period prior to terminating the GSEs' authority to do new business. </li</ul

    A robust non-agency private labelrnsecuritization market is crucial to any future system and increasing guarantee feesrnis necessary but not sufficient to insure the re-entry of private capital.  Stegman said as he looks at the three crucialrnfocal points of reform he sees a new confirmed director of FHFA, a bipartisan commitmentrnto reform on the part of the Senate Banking Committee, and sees “one glaringrnvoid.”  </p

    “Where can we turn to find the focalrnpoint for reforming and reinvigorating the private label securities sector?rnWhere is the center of gravity forrnaddressing standards around reps and warranties, trustee obligations, data andrndisclosure, loss mitigation, and related issues? In the absence of an apparentrnleader, Treasury plans to coordinate a series of conversations with relevant regulators, marketrnparticipants, and other stakeholders to help accelerate necessary reforms inrnthe non-agency space.  </p

    Stegman also told the group thatrnTreasury is not in favor of extending the eligibility for refinancing under thernHome Affordable Refinance Program (HARP) to loans originated after the currentrnMay 31, 2009 cutoff date.  Very fewrnhomeowners whose loans were originated after that date are underwater, he said,rnand changing the date would prolong market and investor uncertainties.  But, hernadded, we must remember the inability of performing underwater borrowers whosernloans are held in private label security trusts to refinance, a situation whichrnhas motivated some communities to suggest using eminent domain to seize and “rightrnsize” residents’ mortgage debt.  “As we work to reform the housingrnfinance system, we will seek to ensure that neither the source of one’srnmortgage nor who owns the credit risk should determine a borrower’s eligibilityrnfor refinancing or mortgage assistance.”

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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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