Tag Archives: Federal Housing Finance Agency

Republicans Ready for GSE Reform?

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Richard_Shelby,_official_portrait,_112th_Congress

Senator Richard Shelby (R-AL)

Senator Shelby (R-AL), the Chair of the Senate Committee on Banking, Housing and Urban Affairs, sent a letter to the U.S. Government Accountability Office regarding the future of Fannie Mae and Freddie Mac, sometimes known as the “enterprises.” It provides an interesting roadmap of Republican thinking about the appropriate role of the federal government in the mortgage market:

the FHFA [Federal Housing Finance Agency] has taken steps that appear to encourage a more active, rather than a reduced, role in the mortgage market for the enterprises. These steps include issuing proposed rules regarding the enterprises’ duty to serve, creating principle [sic] write-down requirements, lowering down-payment requirements, allowing allocation of revenues to the national housing trust fund despite the enterprise having no capital, and other actions. Moreover, the development of the common securitization platform, a joint venture established by the enterprises at the FHFA’s direction, raises a number of questions about the FHFA’s stated goal to gradually contract the enterprises’ dominant presence in the marketplace.

Initially, the purpose of the FHFA’s efforts, such as the common securitization platform, was to facilitate greater competition in the secondary mortgage market, but now it appears that the FHFA is no longer taking steps to enable the platform to be used by entities other than the enterprises.  Likewise, lowering the down-payment requirement for mortgages guaranteed by the enterprises will make the enterprises more competitive with others in the mortgage market, not less. Overall, these FHFA actions raise questions about the goals of the conservatorship and whether its ultimate purpose has changed.

To better understand the impact of these changes, I ask that the GAO study and report the extent to which the FHFA’s actions described above could influence:

  • The enterprises’ dominance in residential mortgage markets;
  • A potential increase in the cost of entry for future competitors to the enterprises;
  • Current and future financial demands on the Treasury;
  • Possible options for modifying the enterprises’ structures (1)

As I have stated previously, Congress and the Obama Administration have allowed the FHFA to reform Fannie and Freddie on its own, with very little oversight. Indeed, the only example of oversight one could really point to would be the replacement of Acting Director DeMarco with Director Watt, a former Democratic member of Congress. It is notable that Watt has continued many of the policies started by DeMarco, a Republican favorite. That being said, Shelby is right to point out that Watt has begun taking some modest steps that Democrats have favored, such as funding the housing trust fund and implementing a small principal-forgiveness program.

Housing finance reform is the one component of the post-financial crisis reform agenda that Congress and the Executive have utterly failed to address. It is unlikely that it will be addressed in the near future. But perhaps the FHFA’s independent steps to create a federal housing finance infrastructure for the 21st century will galvanize the political branches to finally act and implement their own vision, instead of ceding all of their power to the unelected leaders of an administrative agency.

 

Nonbank Mortgage Servicers and the Foreclosure Crisis

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photo by kafka4prez

The United States Government Accountability Office has issued a report, Nonbank Mortgage Servicers: Existing Regulatory Oversight Could Be Strengthened. The GAO found that

The share of home mortgages serviced by nonbanks increased from approximately 6.8 percent in 2012 to approximately 24.2 percent in 2015 (as measured by unpaid principal balance). However, banks continued to service the remainder (about 75.8 percent). Some market participants GAO interviewed said nonbank servicers’ growth increased the capacity for servicing delinquent loans, but they also noted challenges. For example, rapid growth of some nonbank servicers did not always coincide with their use of more advanced operating systems or effective internal controls to handle their larger portfolios—an issue identified by the Consumer Financial Protection Bureau (CFPB) and others.

Nonbank servicers are generally subject to oversight by federal and state regulators and monitoring by market participants, such as Fannie Mae and Freddie Mac (the enterprises). In particular, CFPB directly oversees nonbank servicers as part of its responsibility to help ensure compliance with federal laws governing mortgage lending and consumer financial protection. However, CFPB does not have a mechanism to develop a comprehensive list of nonbank servicers and, therefore, does not have a full record of entities under its purview. As a result, CFPB may not be able to comprehensively enforce compliance with consumer financial laws. In addition, the Federal Housing Finance Agency (FHFA) is the safety and soundness regulator of the enterprises. As such, it has indirect oversight of third parties that do business with the enterprises, including nonbanks that service loans on the enterprises’ behalf. However, in contrast to bank regulators, FHFA lacks statutory authority to examine these third parties to identify and address deficiencies that could affect the enterprises. GAO has previously determined that a regulatory system should ensure that similar risks and services are subject to consistent regulation and that a regulator should have sufficient authority to carry out its mission. Without such authority, FHFA may lack a supervisory tool to help it more effectively monitor third parties’ operations and the enterprises’ actions to manage any associated risks.

As with many GAO reports, this one provides a lot of information about a very obscure, but important, subject. In this case, the report provides a good overview of the servicing industry since the financial crisis. The report also highlights the risks to consumers and the financial industry that result from the rapid expansion of the servicing market share of nonbanks.

One of the disturbing aspects of the foreclosure crisis was the sense that the servicing sector couldn’t do a better job of assisting borrowers, even if it wanted to, because it did not have the resources to meet the challenge. Changes implemented since then, driven in large part by the CFPB, may make things better during the next such crisis. But this report does not give one the sense that they will be all that much better. The GAO report rightly calls for further work to be done to ensure that the industry is prepared to meet the challenges that are sure to come its way.

Principal-ed Forgiveness

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photo by Vic

The Federal Housing Finance Agency announced a new program to implement principal reduction for seriously delinquent, underwater homeowners who meet the following criteria:

  • Are owner-occupants.
  • Are at least 90 days delinquent as of March 1, 2016.
  • Have an unpaid principal balance of $250,000 or less.
  • Have a mark-to-market loan-to-value ratio of more than 115% after capitalization. (1)

The program’s “modification terms include capitalization of outstanding arrearages, an interest rate reduction down to the current market rate, an extension of the loan term to 40 years, and forbearance of principal and/or arrearages up to a certain amount to be converted later to forgiveness.” (1) Once the borrower completes three timely payments, the principal forbearance amount can be forgiven.

This program can help just a small proportion of homeowners who have been underwater on their mortgages. Most importantly, it is being implemented years after the foreclosure crisis swamped the nation’s housing markets. But as can be seen from the criteria above, it is targeted just to homeowners with below-average principal balances on their mortgages and who are severely underwater. There are all sorts of political reasons that principal reduction was not a key component of the post-crisis housing finance reform agenda. But it is worth asking now — should we deploy it more quickly in the next crisis? What would be the principled reasons for doing that?

Many argued that principal forgiveness would reward homeowners for making bad, even immoral, decisions. With the benefit of hindsight, it would have been better to put that questions aside and ask what the best policy option for the country would have been. If outstanding principal balances could have been aligned more closely to the new normal of the post-financial crisis economy, the recovery could have proceeded more quickly.

Now would be the time for the FHFA to implement regulations to deal with the next great recession. If principal forgiveness makes sense under certain conditions, let’s identify them now and then have an easier time of it down the road.

Fannie & Freddie’s Duty to Serve

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Alan Cleaver

The Federal Housing Finance Agency had issued a request for comments on a proposed rulemaking back in December about Enterprise Duty to Serve Underserved Markets. Comments were due yesterday. I drafted a short comment letter on one of the many topics raised by the rulemaking. The abstract reads,

The FHFA has requested input on its proposed rule that would provide a Duty to Serve credit to Fannie Mae and Freddie Mac (The Enterprises) for eligible activities that facilitate a secondary mortgage market for mortgages related to preserving the affordability of housing for homebuyers, among other things.  I write to comment regarding the preservation of affordable homeownership through shared equity homeownership programs.

The Proposed Rule requires that each Objective of an Underserved Markets Plan be measurable in order to determine whether it has been achieved by the Enterprise.  The Proposed Rule requires that these programs “promote successful homeownership.” § 1282.34(d)(4)(iii).  While the Proposed Rule addresses ways that ensure that housing remains affordable for future owners after resale, it does not offer a way to measure successful or sustainable homeownership for participants while they are in a shared equity program.

The FHFA should require that the Enterprises measure the tenure of homeowners participating in shared equity programs and disallow Duty to Serve credit if participants fail to maintain their housing for reasonable length of time.  While this comment is being made in the context of shared equity programs, it applies with equal force to all homeownership programs that are counted for Duty to Serve purposes.

GSE Reform, by Stealth?

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Photo By Greg Willis

The Urban Institute’s Housing Finance Policy Center has issued its January 2016 Housing Finance at a Glance Chartbook. It opens by noting,

The FHFA recently released its 2016 Scorecard for Fannie Mae and Freddie Mac with updated guidance for credit risk transfer transactions. A year ago, under the 2015 scorecard, the FHFA had required Fannie Mae and Freddie Mac to transfer credit risk on a fixed dollar amount of UPB [unpaid principal balance] – $150 billion for Fannie Mae and $120 billion for Freddie Mac. Both exceeded those targets (Fannie $187 billion and Freddie 210 billion). Additionally, the 2015 scorecard did not indicate how much credit risk should be transferred (expected or unexpected, or a specific numeric threshold for example), instead leaving it to the GSEs’ discretion.
But that changes in 2016. FHFA’s 2016 scorecard is a notable departure from 2015 in that it requires the GSEs to transfer credit risk on “at least 90 percent” of the newly acquired UPB (with exceptions for HARP refinances, mortgages with maturities 20 years and below and with loan-to-value ratios 60 percent and below). Another departure from 2015 is the added requirement to transfer a substantial portion of credit risk covering “most of the credit losses projected to occur during stressful economic scenarios.” In other words, GSEs are required to transfer nearly all credit risk on new production, except for what is catastrophic. These two requirements are highly noteworthy because over time they will put the GSEs (and hence the taxpayers) in a remote, catastrophic risk position, letting private capital bear vast majority of credit losses the vast majority of the time – a key objective of most housing finance reform proposals. (3)
I have been arguing for a long time that the private sector should bear the credit risk in the mortgage market, so I think this is a good thing in principle. The FHFA needs to ensure, of course, that the agencies are pricing the transfer of credit risk properly, but overall this is a step in the right direction. Not being privy to any conversations in the Beltway, I always wonder if things like this happen with some kind of bipartisan acquiescence, but I guess we won’t know until someone tells us what happened behind closed doors.

Friday’s Government Reports Roundup

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  • The Federal Housing Finance Agency released its 2016 Scorecard outlining conservatorship priorities for Fannie Mae and Freddie Mac, and Common Securitization Solutions.
  • The Joint Center for Housing Studies released its Rental Housing Report and created an interactive map series that shows where renters are experiencing housing cost burdens.
  • The Labor Department’s latest report finds that there were 292,000 jobs created in December, particularly in temporary-help services, health care, transportation and construction.

The Duty to Serve Underserved Markets

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Riverview Homes Inc

The Federal Housing Finance Agency has issued a Notice of Proposed Rulemaking and Request for Comments regarding Enterprise Duty to Serve Underserved Markets.  The “Enterprises” are Fannie and Freddie and this duty to serve is a highly contested one, with some on the right blaming it for pretty much the whole financial crisis and some on the left arguing that it is the key rationale for keeping the government involved in the mortgage market.

This debate is complicated by the fact that Fannie and Freddie are in conservatorship for the foreseeable future. Whatever one believes the duty to serve should be for the two companies if they were operating independently, one might have a different view of it while they are operating as government instrumentalities.

The Notice provides the following summary:

The Housing and Economic Recovery Act of 2008 (HERA) amended the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Safety and Soundness Act) to establish a duty for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, the Enterprises) to serve three specified underserved markets—manufactured housing, affordable housing preservation, and rural markets—to increase the liquidity of mortgage investments and improve the distribution of investment capital available for mortgage financing for very low-, low-, and moderate-income families in those markets. The Federal Housing Finance Agency (FHFA) is issuing and seeking comments on a proposed rule that would provide Duty to Serve credit for eligible Enterprise activities that facilitate a secondary market for mortgages related to: Manufactured homes titled as real property; blanket loans for certain categories of manufactured housing communities; preserving the affordability of housing for renters and homebuyers; and housing in rural markets. The proposed rule would establish a method for evaluating and rating the Enterprises’ compliance with the Duty to Serve each underserved market.

Written comments must be received on or before March 17, 2016, so get crackin’.