The Federal Housing Finance Agency (“FHFA”) has published an updated strategic plan (“Plan”) setting forth its conservatorship objectives for Fannie Mae and Freddie Mac (the “Enterprises”).
The Plan sets forth three strategic goals:
- Build a new infrastructure for the secondary mortgage market;
- Reduce the Enterprises’ dominant posi-tion in housing finance and simplify and shrink their operations; and
- Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.
The Plan emphasizes that (i) the Enterprises remain essential for the operation of the U.S. housing finance market, (ii) there is no reasonable alternative to the Enterprises currently in sight, and (iii) the Enterprises’ taxpayer-funded losses are so large (currently $180 billion) that they cannot be repaid in any foreseeable scenario. The Plan seeks to maintain the operations of the Enterprises while the development of a parallel private sector securitization structure is pursued.
Build a New Infrastructure
The FHFA believes that a series of initiatives must be pursued in order to develop a private sector securitization channel:
- A single securitization platform that could serve as a market utility, with an open architecture to support multiple issuers of mortgage-backed securities and a wide array of securities and mortgage structures;
- A standardized pooling and servicing agreement to replace the Enterprises’ current Servicer Participation Agree-ment, including (i) transparent servicing requirements that address servicers’ responsibilities to borrowers and inves-tors in a variety of situations and (ii) a compensation structure that promotes competition and takes account of actual servicing costs and requirements;
- Detailed, timely, and reliable reporting of loan-level data to investors at the time a security is issued and throughout a security’s life; and
- Sound and efficient document custody and electronic registration that observes local property law requirements and enhances mortgages’ liquidity.
Reduce the Enterprises’ Dominant Position
The FHFA’s second goal is to reduce the Enterprises’ dominance of the housing finance markets gradually and in a safe and sound manner.1
- In the single-family mortgage credit guarantee business, the gradual shift of credit risk to private investors can be pursued by (i) increasing the Enterprises’ guarantee fees closer to the levels required by private capital investors to support the risk, (ii) developing alternative securities structures that provide for loss sharing, and (iii) expanding reliance on private first-loss mortgage insurance to cover a portion of the credit risk.
- In the multi-family mortgage credit guarantee business, in which the Enterprises’ market share has grown but does not dominate the market as in the single-family field, the Enterprises will undertake a market analysis of the business’ viability if privatized without government guarantees and with pricing adjusted to attract and retain private capital.
- In the capital markets, in which the Enterprises are currently required to reduce their retained mortgage portfolios 10% per year, the depressed market value of some mortgage-backed securities makes it increasingly difficult to continue to divest assets without incurring substantial and otherwise avoidable losses. The Enterprises need to retain their in-house capital markets expertise, notwithstanding pressure on compensation, or to retain third-party investment managers, which would facilitate downsizing but may be more expensive.
Maintain Foreclosure Prevention and Credit Availability
In addition to continuing to purchase or guarantee approximately $100 billion of home purchase and refinance mortgages each month, the Enterprises have significant responsibilities as part of government efforts to reduce foreclosures. To accomplish these objectives, the Plan recommends:
- Implementing (i) the Home Affordable Refinance Program, (ii) the Servicing Alignment Initiative 2 to institute loss mitigation measures at the first sign of borrower distress, (iii) the use of short sales, deeds in lieu of foreclosure, and deeds for lease, and (iv) the conversion of REO properties into rental units;3
- Clarifying the Enterprises’ policies regarding mortgage originators’ representations and warranties and their enforcement; and
- Resolving outstanding mortgage putback requests.
The FHFA has taken a broad view of the needs of, and political realities governing, the U.S. housing finance market. It has prominently subtitled the Plan “The Next Chapter in a Story that Needs an Ending” and stated that only Congress can write the final chapter for the Enterprises. Whether the Plan will serve as an outline for that chapter, and how the story ends, remain to be seen.