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Watt Updates Congress on FHFA Operations

by devteam January 28th, 2015 | Share

Melvin L. Watt, appeared before the House Financial ServicesrnCommittee on Tuesday, his first such appearance since he became director of thernFederal Housing Finance Agency (FHFA) a year ago.  Watt, in his prepared remarks, recounted to committeernmembers some of the efforts of FHFA over the past year and its plans for thernnext few.  FHFA is regulator of thernFederal Home Loan Banks and both regulator and conservator of the tworngovernment sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.  </p

The majority of Watt’s testimony concerned the GSEs   He said his agency had acted consistentlyrnover the past year to ensure their safety and soundness and to make sure they bothrnprovide liquidity to the housing markets and meet their obligations to homeownersrnas specified by the Emergency Economic Stabilization Act of 2008 (EESA).</p

Since being placed in conservatorship in 2008 the financialrnconditions and operations of the GSEs has improved significantly.  Neither has made a draw from the Treasuryrnsince early 2012 although, Watt said, some of the improvement relates tornone-time or transitory items such as legal settlements, tax benefits, andrnrelease of loan loss reserves as home prices have risen.  Some improvements however can be credited tornresponsible business practices, better underwriting, and increased guaranteernfees. </p

There are still significantrnchallenges.  Loan delinquencies whilerndown are still high by historic standards and counterparty exposure remains arnconcern.  Risks from the mortgage-relatedrninvestment portfolios are declining with the size of those portfolios but sornare revenues.  Both GSE’s are working tornmaintain and improve their operational and information technologyrninfrastructures and each has the challenge of attracting and maintaining thernbest qualified workforce while the companies’ futures remain in doubt.   </p

FHFA has taken a risk-based approach tornsupervising the GSEs.  In addition tornregular on-site examinations, it communicates supervisory standards to thernentities, establishes expectations for risk management, and identifies andrnrequires remediation of identified risk deficiencies.  Over the last year Watt said FHFA had givenrnsupervisory guidance to the GSEs on counterparty risk management, mortgagernservicing transfers, cyber and liquidity risk management. </p

While it came late in his prepared remarks, Watt raised a concernrnwhich appeared, while not a new, to be a risk that is gaining importance.  During 2014 FHFA has continued to monitor andrnassess two areas of state-level actions that “threatenrnthe legal priority of single-family loans owned or guaranteed by Fannie Mae andrnFreddie Mac;” certain energy retrofit programs  structured as tax assessments and priorityrnliens that are granted by many state laws to homeowner associations.  </p

Watt said FHFA is notrnopposed to programs that finance efforts to improve energy efficiency, but theyrnmust be structured so as not to undermine the first-lien status of GSErnmortgages.  He singled out the Property Assessed Clean Energy (PACE)rnprograms and said FHFA has reiterated that Fannie Mae and Freddie Mac’srnpolicies prohibit the purchase of a mortgage on property with an attachedrnfirst-lien PACE loan.  Thus a homeownerrnwith such a loan cannot refinance their existing mortgage with a Fannie Mae orrnFreddie Mac mortgage.  Second, anyone wanting to buy a home that alreadyrnhas a first-lien PACE loan cannot use a Fannie Mae or Freddie Mac loan for thernpurchase.  In addition to aggressive enforcement of these existingrnpolicies, FHFA is continuing to evaluate or explore other possible remedies andrnlegal actions to protect the GSEs’ lien position.   The agency has also taken legal action wherernunpaid homeowner association dues have been deemed senior to first mortgagesrnowned or guaranteed by Fannie Mae or Freddie Mac.  </p

Watt said FHFA has developed and workedrnoff of a set of Strategic Goals for each of the last several years along with arnScorecard of Objectives for conservatorship of the GSEs.  The 2015 version of goals has been published,rnbuilding off of the 2014 goals.  Both thern2014 and 2015 Conservatorship Scorecards are centered on three strategicrngoals.   </p

Under the first goal, to MAINTAIN credit availability and foreclosurernprevention activities.  FHFA andrnthe GSEs have focused on a number of related objectives: </p<ul class="unIndentedList"<liUpdatingrnand clarifying the Representations and Warranty Framework. Substantial progress has been made. FHFA provided greater clarity around the life-of-loanrnexclusions used in the Framework during 2014, and further improvements werernannounced in November which 1) limit repurchase requests under the life-of-loanrnexclusions to significant matters that impact the overall credit risk of thernloan; 2) incorporate a significance test for exclusions for misrepresentationsrnand data inaccuracies; 3) clarify the requirements for requesting repurchasernrelated to compliance with applicable laws and regulations; and 4) providernlenders a list of unacceptable mortgage products. Earlier in 2014, FHFArnand the Enterprises also announced other Framework refinements that includedrnrevising payment history requirements, providing written notification ofrnrepurchase relief to lenders, and eliminating automatic repurchases forrnmortgage insurance rescissions. </li</ul

FHFA also beganrndevelopment of an independent dispute resolution program that could be used asrna last step to resolve disputes.  Lendersrncould challenge a repurchase request by requesting a neutral third party determinernwhether there was a breach of the selling representations and warranties justifyingrnthe repurchase request.  </p<ul<liProviding Targeted Access to Credit Opportunitiesrnfor Creditworthy Borrowers. Last monthrnthe GSEs announced purchasernguidelines for a mortgage with a three percent down payment. This will provide important – but targeted -rnaccess to credit opportunity for borrowers who are creditworthy but lack thernfunds for a traditional downpayment.rnThese guidelines do not allow risk layering and include compensatingrnfactors and risk mitigants such as counseling or stronger credit historiestornevaluate a borrower’s creditworthiness. The loans must be fullyrndocumented, not exceed a 30 year term, have a fixed rate, leverage the GSEs’ existingrnautomated underwriting systems and require private capital credit enhancement. </li<liWorking with Small Lenders, Rural Lenders andrnHousing Finance Agencies. In the first quarter of 2014, the GSEs issuedrnguidance clarifying a number of property and appraisal requirements for dwellingsrnin small towns and rural areas. Fannie Mae cleared the way for morernefficient lending under HUD and USDA guarantees and piloted expanded partnershipsrnwith county-level HFAs. FHFA expects thernGSEs to continue outreach and initiatives with small lenders, rural lenders,rnand housing finance agencies in 2015, including exploring the feasibility ofrnpurchasing a greater number of manufactured housing loans that are secured byrnreal estate. </li<liLoss Mitigation and Foreclosure PreventionrnActivities. As of October 31, 2014, the Enterprisesrnhad conducted nearly 3.4 million foreclosure prevention actions since the startrnof the conservatorships. Going forwardrnthe GSEs are expected to leverage and build on earlier activities including thernNeighborhood Stabilization Initiative. FHFA has selected the City ofrnDetroit and Cook County, Illinois for pilot programs to improve outcomes inrnhardest hit markets.</li

  • Multifamily Support.  The 2015 Scorecard requires each GSE torncontinue multifamily purchases not exceeding a volume cap of $30 billion eachrnalthough they can provide financing for affordable rental housing beyond thisrncap.  Thernfocus is to support the financing of affordable housing and the housing needsrnof people in rural and other underserved areas, including areas that relyrnheavily on manufactured housing.  </li</ul

    On multifamilyrnpurchases FHFA will continue to require the GSEs to share risk with the privaternsector.  Freddie Mac does this through arncapital markets structure and Fannie Mae through a risk sharing model.  </p

    In the 2015 Conservatorship Scorecard, FHFArnalso expressed an expectation that the GSEs address other priorities, such asrnassessing the reliability and the operational feasibility of alternate orrnupdated credit score models.</p

    FHFA’s second strategic goal, REDUCE,rnis focused on ways to bring additional private capital into the system in orderrnto reduce taxpayer risk.  FHFA’s objectives include ongoing requirementsrnfor the GSEs to conduct single-family credit risk transfers, reduce thernretained portfolio of each, and update private mortgage insurance eligibilityrnrequirements.  </p<ul class="unIndentedList"<liCredit Risk Transfers. The target for these transfers increased in 2014rnto $90 billion in unpaid principal balance (UPB) from $30 billion in 2013 andrnthe targets in 2015 are $150 billion for Fannie Mae and $120 billion forrnFreddie Mac and each is expected to execute at least two different types ofrncredit risk transfer transactions. Allrnactivities undertaken in fulfillment of these objectives must be conducted in arnmanner consistent with safety and soundness.</li</ul

    Retained Portfolio Reductions. rnBoth Fannie Mae and Freddie Mac have developed plans to meet their 2018 targetsrnof reducing their portfolios down to $250 billion each.   Asrntheir portfolios continue to decline, they are transferring interest rate risk,rncredit risk on securities and liquidity risk from these portfolios to thernprivate sector.  As of September 30, 2014, Freddie Mac’s portfolio stoodrnat $414 billion, and Fannie Mae’s at $438 billion.  </p<ul class="unIndentedList"<liPrivate Mortgage Insurer EligibilityrnRequirements. FHFA is in the process ofrnreviewing requested public input on Private Mortgage Insurer EligibilityrnRequirements. The agency's objective is for the GSEs to strengthenrntheir risk management by enhancing the financial, business, and operationalrnrequirements in place for these counterparties, thereby enhancing insurers'rnability to pay claims over the long-term. </li</ul

    The thirdrnStrategic Goal is to BUILD a new single-family securitization infrastructure</b(CSP) for use by the GSEs and adaptable for use by other secondary marketrnparticipants in the future.  The first objective for the CSP is to makernsure that it works for the benefit of Fannie Mae and Freddie Mac and FHFA isrnrequiring that the CSP leverage the systems, software and standards used in thernprivate sector wherever possible so that it will be adaptable for use by others.rnIn addition, FHFA has worked with the GSEs to leverage the CSP in order torndevelop a Single Security, which Watt said could improve liquidity in thernhousing finance markets.  </p

    Watt said his agency and the GSEs havernmade significant progress on both the CSP and the Single Security in the pastrnyear including employment of a Chief Executive Officer for CommonrnSecuritization Solutions (CSS) – the entity expected to house and operate thernCSP.  There was also considerable progress made on the design-and-buildrnphase of the CSP with GSE staff designated to work at the CSS location.  Work has been done to incorporate the SinglernSecurity into the development of the CSP and the GSEs have reorganized theirrnstaffs with business operations and information technology experts to developrnthe systems and processes needed to integrate with the CSP.  </p

    The agency issued a Request for Input</bon FHFA's proposed Single Security structure last year as the first step in arnmultiyear process and is working with the GSEs to process the feedbackrnreceived.  It is an objective of the 2015rnScorecard that the GSEs would finalize the Single Security structure duringrn2015 and begin the process of planning to implement it in the market. </p

    In addition to the activities outlinedrnabove, FHFA continues to work on a number of other matters and initiatives thatrnimpact Fannie Mae and Freddie Mac.  Amongrnthese are increases in guarantee fees. rnWatt suspended announced increases in the fees upon assuming therndirectorship and is now reviewing responses to a Request for Input thatrnprovided further details on how the GSEs set their fees and how fee levelsrnaffect various aspects of the mortgage market.  During the Q&A portion of the testimony, he indicated that no decisions have been made yet.</p

    The agency is also reviewing publicrncomment on a proposed rule setting goals for GSE single and multifamily loanrnpurchases from 2015 through 2017. </p

    FHFA recently notified the GSEs tornbegin setting aside funds to be allocated to the Housing Trust Fund and thernCapital Magnet Fund.  These allocationsrnwere temporarily suspected by FHFA under the authority of HERA in 2008.  These letters notifying the GSEs of thernreversal of the suspension established prudent safeguards in the event ofrnadverse changes in the Enterprises’ financial condition or draws under theirrnTreasury agreement.  

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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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