Tag Archives: freddie

Road to GSE Reform

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photo by Antonio Correa

A bevy of housing finance big shots have issued a white paper, A More Promising Road to GSE Reform. The main objective of the proposal

is to migrate those components of today’s system that work well into a system that is no longer impaired by the components that do not, with as little disruption as possible. To do this, our proposal would merge Fannie and Freddie to form a single government corporation, which would handle all of the operations that those two institutions perform today, providing an explicit federal guarantee on mortgage-backed securities while syndicating all noncatastrophic credit risk into the private market. This would facilitate a deep, broad and competitive primary and secondary mortgage market; limit the taxpayer’s risk to where it is absolutely necessary; ensure broad access to the system for borrowers in all communities; and ensure a level playing field for lenders of all sizes.

The government corporation, which here we will call the National Mortgage Reinsurance Corporation, or NMRC, would perform the same functions as do Fannie and Freddie today. The NMRC would purchase conforming single-family and multifamily mortgage loans from originating lenders or aggregators, and issue securities backed by these loans through a single issuing platform that the NMRC owns and operates. It would guarantee the timely payment of principal and interest on the securities and perform master servicing responsibilities on the underlying loans, including setting and enforcing servicing and loan modification policies and practices. It would ensure access to credit in historically underserved communities through compliance with existing affordable-housing goals and duty-to-serve requirements. And it would provide equal footing to all lenders, large and small, by maintaining a “cash window” for mortgage purchases.

The NMRC would differ from Fannie and Freddie, however, in several important respects. It would be required to transfer all noncatastrophic credit risk on the securities that it issues to a broad range of private entities. Its mortgage-backed securities would be backed by the full faith and credit of the U.S. government, for which it would charge an explicit guarantee fee, or g-fee, sufficient to cover any risk that the government takes. And while the NMRC would maintain a modest portfolio with which to manage distressed loans and aggregate single- and multifamily loans for securitization, it cannot use that portfolio for investment purposes. Most importantly, as a government corporation, the NMRC would be motivated neither by profit nor market share, but by a mandate to balance broad access to credit with the safety and soundness of the mortgage market. (2-3, footnotes omitted)

The authors of the white paper are

  • Jim Parrott, former Obama Administration housing policy guru
  • Lewis Ranieri, a Wall Street godfather of the securitized mortgage market
  • Gene Sperling,  Obama Administration National Economic Advisor
  • Mark Zandi, Moody’s Analytics chief economist
  • Barry Zigas, Director of Housing Policy at Consumer Federation of America

While I think the proposal has a lot going for it, I think that the lack of former Republican government officials as co-authors is telling. Members of Congress, such as Chair of the House Financial Services Committee Jeb Hensaerling  (R-TX), have taken extreme positions that leave little room for the level of government involvement contemplated in this white paper. So, I would say that the proposal has a low likelihood of success in the current political environment.

That being said, the proposal is worth considering because we’ll have to take Fannie and Freddie out of their current state of limbo at some point in the future. The proposal builds on on current developments that have been led by Fannie and Freddie’s regulator and conservator, the Federal Housing Finance Agency. The FHFA has required Fannie and Freddie to develop a Common Securitization Platform that is a step in the direction of a merger of the two entities. Moreover, the FHFA’s mandate that Fannie and Freddie’s experiment with risk-sharing is a step in the direction of the proposal’s syndication of “all noncatastrophic credit risk.” Finally, the fact that the two companies have remained in conservatorship for so long can be taken as a sign of their ultimate nationalization.

In some ways, I read this white paper not as a proposal to spur legislative action, but rather as a prediction of where we will end up if Congress does not act and leaves the important decisions in the hands of the FHFA. And it would not be a bad result — better than what existed before the financial crisis and better than what we have now.

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.

Outrage

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photo by Dmitry Kalinin

A federal judge has held that a mortgage servicer committed “the tort of outrage when it charged attorney’s fees and costs to plaintiff’s mortgage account and refused to explain the charges upon request.” (1) Lucero v. Cenlar FSB, No. C13-0602RSL (W.D. Wash. Jan. 28, 2016) (Lasnik, J.) The case has an all-too-typical story of servicer misbehavior — the repeated phone calls that went nowhere, the absence of any servicer representative with actual knowledge of why the servicer was acting the way that it was, the unjustified fees that just kept compounding into five-figure nightmares.

The Court found that under Washington law,

The elements of the tort of outrage are “(1) extreme and outrageous conduct, (2) intentional or reckless infliction of emotional distress, and (3) severe emotional distress on the part of plaintiff.” Rice v. Janovich, 109 Wn.2d 48, 61 (1987). Based on the evidence submitted at trial, plaintiff has raised a reasonable inference and the Court finds that Cenlar, annoyed that plaintiff had sued it after obtaining a loan modification and looking for leverage to force her to abandon this litigation, adopted a strained and unprincipled analysis of the to justify the imposition of unpredictable and enormous charges directly onto plaintiff’s mortgage statements as “Amounts Due.” Cenlar, having reviewed plaintiff’s financial situation less than a year before and being fully aware that plaintiff was paying late charges every month, had no reason to believe that she could cope with these charges. Cenlar reasonably should have known (and was likely counting on the fact) that these charges would cause immense emotional distress, which they did. Cenlar compounded the distress by denying plaintiff information about these charges or the justification therefore. The first notice of the charges stated that they were charged “in keeping with Washington law.” This assertion is wholly unsupported: Cenlar’s witness acknowledges that the letter was a form into which the reference to “Washington law” was inserted simply because the loan originated in Washington. No Washington case law, statute, or regulation has been identified that authorize the charges levied against plaintiff’s mortgage account. When plaintiff requested information regarding the charges, she was ignored for months. Eventually various contract provisions were identified, and Cenlar asserted that it was simply keeping track of charges it might eventually seek to recover from plaintiff. Regardless of whether Cenlar was demanding immediate payment or was simply threatening to collect them in the future, the message was clear: continue this litigation and we will take your home. Such conduct is beyond the bounds of decency and is utterly intolerable. (14-15, footnotes omitted)

Decisions like this tend to give us a warm feeling in our stomach — justice has been done! But the truth is that for every case like this, there are thousands of homeowners who were severely mistreated and had to just take it on the chin. Federal regulation of the housing finance system should get to the point where these situations are the rare, rare exception. We have a long way to go.

 

HT Steve Morberg

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’.

P2P, Mortgage Market Messiah?

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Monty Python's Life of Brian

As this is my last post of 2015, let me make a prediction about the 2016 mortgage market. Money’s Edge quoted me in Can P2P Lending Revive the Home Mortgage Market? It opens,

You just got turned down for a home mortgage – join the club. At one point the Mortgage Bankers Association estimated that about half of all applications were given the thumbs down. That was in the darkest housing days of 2008 but many still whisper that rejections remain plentiful as tougher qualifying rules – requiring more proof of income – stymie a lot of would be buyers.

And then there are the many millions who may not apply at all, out of fear of rejection.

Here’s the money question: is new-style P2P lending the solution for these would-be homeowners?

The question is easy, the answers are harder.

CPA Ravi Ramnarain pinpoints what’s going on: “Although it is well documented that banks and traditional mortgage lenders are extremely risk-averse in offering the average consumer an opportunity for a home loan, one must also consider that the recent Great Recession is still very fresh in the minds of a lot of people. Thus the fact that banks and traditional lenders are requiring regular customers to provide impeccable credit scores, low debt-to-income (DTI) ratios, and, in many cases, 20 percent down payments is not surprising. Person-to-person lending does indeed provide these potential customers with an alternate avenue to realize the ultimate dream of owning a home.”

Read that again: the CPA is saying that for some on whom traditional mortgage doors slammed shut there may be hope in the P2P, non-traditional route.

Meantime, David Reiss, a professor at Brooklyn Law, sounded a downer note: “I am pretty skeptical of the ability of P2P lending to bring lots of new capital to residential real estate market in the short term. As opposed to sharing economy leaders Uber and Airbnb which ignore and fight local and state regulation of their businesses, residential lending is heavily regulated by the federal government. It is hard to imagine that an innovative and large stream of capital can just flow into this market without complying with the many, many federal regulations that govern residential mortgage lending. These regulations will increase costs and slow the rate of growth of such a new stream of capital. That being said, as the P2P industry matures, it may figure out a cost-effective way down the line to compete with traditional lenders.”

From the Consumer Financial Protection Bureau (CFPB) to Fannie and Freddie, even the U.S. Treasury and the FDIC, a lot of federal fingers wrap around traditional mortgages. Much of it is well intended – the aims are heightened consumer protections while also controlling losses from defaults and foreclosures – but an upshot is a marketplace that is slow to embrace change.

Fannie/Freddie 2016 Scorecard

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Anne Madsen

The Federal Housing Finance Agency has posted the 2016 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions. The FHFA assesses the three entities using the following criteria, among others:

  • The extent to which each Enterprise conducts initiatives in a safe and sound manner consistent with FHFA’s expectations for all activities;
  • The extent to which the outcomes of their activities support a competitive and resilient secondary mortgage market to support homeowners and renters . . . (2)

The FHFA expects Fannie and Freddie to “Maintain, in a Safe and Sound Manner, Credit Availability and Foreclosure Prevention Activities for New and Refinanced Mortgages to Foster Liquid, Efficient, Competitive, and Resilient National Housing Finance Markets.” (3) The specifics are, unfortunately, not too specific when it comes to big picture issues like maintaining credit availability in a safe and sound manner, although the scorecard does discuss particular programs and policies like the Reps and Warranties Framework and the expiration of HAMP and HARP.

The FHFA also expects Fannie and Freddie to “Reduce Taxpayer Risk Through Increasing the Role of Private Capital in the Mortgage Market.” Here, the FHFA has more specifics, as it outlines particular risk transfer objects, such as requiring the Enterprises to transfer “credit risk on at least 90 percent of the unpaid principal balance of newly acquired single-family mortgages in” certain loan categories. (5)

The last goals relate to the building of the Common Securitization Platform and Single Security: Fannie and Freddie are to “Build a New Single-Family Infrastructure for Use by the Enterprises and Adaptable for Use by Other Participants in the Secondary Market in the Future.” (7) The FHFA us moving with all deliberate speed to reshape the secondary mortgage market in the face of indifference or gridlock in Congress.

The FHFA may implement the reform of Fannie and Freddie all by its lonesome. Maybe that’s the best result, given where Congress is these days.