FHFA Sends Congress Strategic Plan for GSEs

by devteam February 22nd, 2012 | Share

The Federal Housing Finance Agencyrn(FHFA) said Tuesday that, with its conservatorship of Fannie Mae and FreddiernMac (the Enterprises) now in operation for more than three years “and nornnear-term resolution in sight,” it was time to assess its goals andrndirections.  In a letter submitted to thernchairs and ranking members of the House Committee on Financial Services and thernSenate Committee on Banking, Housing, and Urban Affairs, Acting FHFA DirectorrnEdward J. DeMarco set out a Strategic Planrnfor Fannie Mae and Freddie Mac Conservatorships with three goals:</p<ol

  • Build a new infrastructure for the secondary mortgagernmarket;</li
  • Graduallyrncontract the Enterprises’ dominant presence in the marketplace whilernsimplifying and shrinking their operations;</li
  • Maintainrnforeclosure prevention activities and credit availability for new andrnrefinanced mortgages.</li</ol

    DeMarco said in moving forward FHFA hasrnto consider that:</p<ul class="unIndentedList"<liThernEnterprises' losses are of such magnitude that they will not be able to repayrntaxpayers in any foreseeable scenario;</li<liThernoperational infrastructures of each are working but require substantialrninvestment to support future business which presents an issue of whether tornrebuild or start anew;</li<liMinimizingrntaxpayer losses, ensuring market liquidity and stability requires preservingrnthe Enterprises as working entities but this requires some things such asrnretaining private sector pay comparability that have generated concern becausernof taxpayer involvement;</li<liAlthoughrnthe housing finance system cannot be called healthy it is stable andrnfunctioning, albeit with substantial government support;</li<liCongressrnand the Administration have not reached consensus on how to resolve thernconservators and define a path forward.</li</ul

    The absence of any existing meaningfulrnsecondary mortgage market mechanisms beyond the Enterprises and Ginnie Mae is arndilemma for policymakers who want to replace them and was a key motivation forrnconservatorship in the first place.  Thernelements for rebuilding the system are already known and work can begin withoutrnknowing whether there will be a government guarantee other than through FHA.  A secondary market structure without thernEnterprises would likely include:</p<ul class="unIndentedList"<liArnframework to connect capital markets to investors to homeowners – i.e. arnsecuritization platform that bundles mortgages and provides support to processrnand track payments from borrowers through to investors.</li<liArnstandardized pooling and servicing agreement that corrects the many shortcomingsrnin the agreements used in the private-label mortgage-backed securities (MBS)rnmarket pre-housing crisis.</li<liTransparentrnservicing requirements that set forth servicers responsibilities to investorsrnand borrowers.</li<liArnservicing compensation structure that promotes competition rather than concentrationrnof servicing, takes into account servicers' costs and requirements, andrnconsiders the appropriate interaction between origination and servicingrnrevenue;</li<liDetailed,rntimely and reliable loan-level data for investors that is maintained through thernlife of the MBS.</li<liArnsound, efficient system for document custody and electronic registration thatrnrespects local property laws and enhances the liquidity of mortgages.</li<liAnrnopen architecture for all these elements to facilitate entry to and exit fromrnthe marketplace and an ability to adapt to emerging technologies and legalrnrequirements over time.</li</ul

    Since entering conservatorship thernEnterprises have guaranteed roughly 75 percent of the mortgages originated inrnthe U.S. with FHA guaranteeing most of the rest.  Shifting mortgage credit risk away from thernEnterprises to private investors could be accomplished in several ways.  The following are either under considerationrnor actively being implemented. </p<ul class="unIndentedList"<liIncreasernguarantee fee pricing. In September,rn2011 FHFA announced its intention to continue a path of gradual pricesrnincreases based on risk and the cost of capital. In December Congress directed it to increasernguarantee fees by at least 10 basis points as part of the revenue raisingrnaspects of the Temporary Payroll Tax Cut Continuation Act and Congress alsornencouraged FHFA to require guarantee fee changes that reducerncross-subsidization of relatively risky loans and eliminate differences in feesrnacross lenders not clearly based on cost or risk.</li<liVariousrnapproaches, including senior-subordinated security structures that could resultrnin private investors bearing some or all of the credit risk.</li<liExpandrnreliance on mortgage insurance through deeper mortgage insurance coverage onrnindividual loans or through pool-level insurance policies that would insure arnportion of the credit risk currently retained by the Enterprises.</li</ul

    ThernEnterprises do not dominate the multi-family credit guarantee business andrnapproach it very differently from their single-family business.  For a significant portion, Fannie Mae sharesrnrisk with loan originations and for a significant and growing part Freddie Macrnshares credit risk with investors through securities.  Given these conditions, generating potentialrnvalue for taxpayers and contracting the multifamily market footprint should bernapproached differently and each Enterprise will undertake a market analysis ofrnits operations.</p

    Capitalrnmarket activities have long been considered the Enterprises’ source of greatestrnprofits, controversy, and risk.  Thesernhave been used to fund the retained portfolios and is a complex businessrnactivity requiring specialized and expert risk managers.  This business line is already on a gradualrnwind-down path with the Treasuring requiring a 10 percent reduction in the retainedrnportfolio each year.  New mortgages arernprimarily delinquent ones removed from MBS and other legacy assets have little liquidity.  Over time the retained portfolios arernbecoming smaller but also less liquid.  </p

    Maximizingrntaxpayer value on these assets is a key consideration and there is argument forrnholding some for a longer period.  Thisrnin turn requires management, either by retaining in-house expertise or by contractingrnto a third party.  The first is less disruptivernbut requires human capital risk which increases with the proposed legislationrnon Enterprise compensation.  The secondrnwould hasten the shrinkage in Enterprise personnel but would be more costly andrnwould pose new control and oversight issues for FHFA.</p

    Thernthird strategic goal is maintaining foreclosure prevention efforts and creditrnavailability.  The Enterprises mustrncontinue and enhance:</p<ul class="unIndentedList"<liSuccessfulrnimplementation of the Home Affordable Refinance Program (HARP) along with thernprogram changes announced last October.</li<liContinuedrnimplementation of the Servicing Alignment Initiative including its approach tornloss mitigation through loan modifications and early outreach to distressedrnborrowers;</li<liRenewedrnfocus on short sales, deeds-in-lieu, and deeds-for-lease options;</li<liFurtherrndevelopment and implementation of the REO disposition initiatives announced byrnFHFA last year including efforts to convert properties into rental units.</li</ul

    The Enterprises almost need to resolve otherrnlong-standing concerns in the marketplace that may be suppressing a more robustrnrecovery and limited credit.  One majorrnissue is concerns over representations and warrantees.  These policies must be made more transparentrnand conditions for their implementation defined.</p

    In accomplishing the three goals, therernmust be consideration of human capital as well. rnThe boards and executives responsible for the business decisions thatrnled to conservatorship are long gone and shareholders of the Enterprises haverneffectively lost their investments. The public interest is best served byrnensuring that the Enterprises have the best possible leaders to carry out thernwork and a search is underway for new CEOs for each company and otherrnexecutives willing to take on the necessary challenges in the face of ongoingrncriticism of the companies and uncertain legislative environment.  FHFA and the Enterprise boards have takenrnseriously the Congressional criticism of compensation structure and are workingrnto create new ones that will be all salary with the largest portion deferredrnand at-risk.

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  • About the Author


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

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