In a speech on Thursday the director of the Federal Housing Finance Agency (FHFA) emphasized one of the three familiar goals of his agency's 2015 scorecard for the conservatorship of Fannie Mae and Freddie Mac. Melvin L. Watts told an audience at the Goldman Sachs Housing Finance Conference that FHFA would again structure its conservatorship of two government sponsored enterprises (GSEs) around goals to Maintain assets of the GSEs; Reduce risk to them and consequently to taxpayers, and Build for the future.
Watt said that for 2015 Build means continued progress of a new securitization infrastructure for the GSEs that will be adaptable for other secondary market participants in the future. This has two parts; continuing to build the Common Securitization Platform (CSP) and moving toward a Single Security for both of the GSEs.
Developing a Single Security was included in the conservatorship priorities for the first time in 2014 he said, and the objective is to improve overall market liquidity and reduce the disparity between Freddie Mac and Fannie Mae securities which has been costly to Freddie Mac.
His agency released a Request for Input last August laying out possible features of a Single Security, how it could operate, and how a transition to it might take place. FHFA is now reviewing responses to the Request and continuing conversations with those who would be impacted.
A high priority for 2015 is to provide increasing levels of detail about the Security. Watt said one strong message received from stakeholders is that additional information and greater clarity is needed about security features and disclosure standards, about transitioning legacy securities to the Single Security, about the counterparty status of commingled re-securitizations, and about a range of other potential issues.
That message has been heeded, he said, and FHFA will provide more details in an update that should be released in the second quarter of this year. "While the Single Security remains a multi-year initiative, we believe this update report will be a significant milestone in defining the structure and processes necessary to successfully transition to a Single Security in the future."
The GSE's have also been instructed to develop preliminary plans for implementing the Security in the market. These plans will not be developed in a vacuum, Watt said. FHFA and the GSEs will gather feedback and input from market participants as the plans develop.
Another Scorecard objective is to continue to Reduce risks to the taxpayers by increasing the role of private capital in the mortgage market. 2014 was a breakthrough year for the GSEs' single-family credit risk transfer programs which have now evolved into regular debt issuances that have gained broad market acceptance.
FHFA tripled the requirement for each GSE in 2014 from transferring a portion of credit risk on single-family mortgages with an unpaid principal balance of $30 billion in 2013 to $90 billion in 2014. Each surpassed that benchmark by executing credit risk transfer transactions on m mortgages with a combined UPB of over $300 billion.
In 2014, the Enterprises also offered transactions that targeted private capital in the insurance and reinsurance markets. Freddie Mac completed three reinsurance deals, and Fannie Mae completed one.
Building on this success, the requirement for Fannie Mae in 2015 will be to complete transactions to transfer credit risk on single-family mortgages with unpaid principal balances of $150 billion and Freddie Mac's goal will be $120 billion. In addition the GSEs will be expected to refine and innovate in their existing credit risk transfer strategies - for example more transfers of first loss positions - and to develop ways of transferring risk to different kinds of market participants including broadening diversity to engage with minority-, women-, and disabled-owned businesses.
Watt said there were no surprises in 2015 for the goal to Maintain; the agency merely wants to continue with two objectives. The first is maintain, promote, and expand access to credit in a safe and sound manner and the second is to continue to improve the GSE's loss mitigation and foreclosure prevention activities.
The first objective was furthered in several ways in 2014. The updating and clarification of the Representation and Warranty Framework provided lenders with greater certainty about when and under what circumstances they would be required to repurchase or take back loans, and servicers with a greater comfort level about their obligation to pay compensatory fees. A second effort, updating and enhancing counterparty standards for mortgage services, set minimum net worth requirements for all servicers who work with the GSEs and capital and liquidity requirements for nonbank servicers. These standards will improve access to credit by reducing uncertainty about GSE expectations for servicers.
The GSEs are also under orders to reduce the number of severely delinquent loans - there are approximately 300,000 that are a year or more in arrears - and to do so in a responsible way. The sale of non-performing loans (NPLs) is one of the key tools FHFA believes the GSEs can use to meet this Scorecard priority. When NPL sales are transferred to new buyers and servicers in a responsible way these new entities will have the capacity, self-interest, and track records to provide borrowers with foreclosure alternatives.
This past week FHFA released new requirements for future NPL sales. The new requirements will necessitate substantial outreach by the GSEs to identify bidders who can meet established modification and loss mitigation standards. The winning bidders will also be required to track and report what happens with borrowers so FHFA and the Enterprises can monitor and document the success of the program.
