After GSE Conservatorship Comes…What?

After GSE Conservatorship Comes...What? WORD ON THE STREET: Last September, I spoke before the American Mortgage Conference about some of the long-term improvements to the functioning of the housing finance system that we were considering. In particular, I mentioned four specific initiatives that we had already announced – Uniform Mortgage Data Program; Joint Servicing Compensation Initiative; Strategic Alignment Initiative; and enhanced loan level disclosures for enterprise mortgage-backed securities – and I explained why these meaningful steps would improve housing finance and help us prepare for the future.

I also mentioned that further consideration should be given to guarantee-fee pricing and other forms of risk sharing so that the government-sponsored enterprises' (GSEs) operations would better reflect what might be expected of them if they were private companies not operating in conservatorship. This was in the context of the statutory requirement we have as conservator to move the GSEs toward a sound and stable financial condition.

Since then, we at the Federal Housing Finance Agency (FHFA) formalized our thinking along these lines by issuing a Strategic Plan for the Enterprise Conservatorships in February of this year. The very next month, we followed that with the release of our Strategic Plan with a scorecard, to show how we were going about implementing this plan.

The Strategic Plan begins to lay out a series of initiatives and strategies that will improve current mortgage processes, inspire greater confidence among prospective market participants and set the stage for an improved future system of housing finance.

The plan identifies three strategic goals for the next phase of the conservatorships:

  • Build a new infrastructure for the secondary mortgage market;
  • Contract, gradually, the GSEs' dominant presence in the marketplace while simplifying and shrinking their operations; and
  • Maintain foreclosure prevention activities and credit availability for new and refinanced mortgages.

In these three goals, the plan builds on many of the initiatives that I discussed last year and sets forth objectives that are consistent with the FHFA's legal mandate and the policy direction that has emerged from the administration and Congress.

Given that the document is a strategic plan and not a step-by-step guide, I want to mention some of the specific actions the FHFA is taking to implement the plan. In particular, I want to focus on a couple of steps we are taking toward building a secondary mortgage market infrastructure.

A cornerstone of what we are seeking to build is a new securitization platform that could serve both Fannie and Freddie while in conservatorship – and potentially serve the secondary mortgage market in a post-conservatorship world that has multiple issuers of mortgage-backed securities. In addition to the securitization platform, the new infrastructure would provide new standards for a variety of contractual agreements, rules and regulations of which the pooling and servicing agreement is a cornerstone.

In the strategic plan, we said that the FHFA would determine how the GSEs can work together to build a common securitization platform to replace their current systems. This analysis is well under way, as is analysis of a proposed model pooling and servicing agreement.

Now, given that the securitization infrastructure could serve as a utility that would outlast Fannie and Freddie as we know them, we are committed to seeking input from all market stakeholders. Consistent with this commitment, the FHFA anticipates issuing in October a white paper on a new securitization infrastructure for public comment. The GSEs are working together with the FHFA to develop this new infrastructure and identify issues that would benefit from such public input. However, we anticipate the actual building of the securitization platform to be a multi-year effort.

There may be some confusion between the securitization platform and the establishment of a single enterprise security. Enterprise security performance has been a long-standing issue in the market, and the establishment of the conservatorships has affected this issue in various ways. Our immediate priority is a single, common platform not a single security.

I want to be clear about our Strategic Plan's vision for the future. I strongly believe in the value and importance of competitive markets. A common securitization platform may one day operate as a public utility that enhances liquidity, standardization, and transparency, which should promote a more competitive market.

In our view, whatever the structure of the secondary mortgage market of the future, certain key functions will need to be performed. And in many cases, like developing data reporting standards, the standardization of such functions would provide benefits to the overall market.

As we prepare to transition to a new secondary mortgage market that will operate in a post-conservatorship world, we anticipate that Fannie and Freddie will maintain their own distinct securitization operations and continue to issue their own securities. And while Fannie Mae and Freddie Mac continue their respective corporate activities while in conservatorship, the FHFA is thinking ahead to a secondary market with multiple firms competing to bring the capacity of global capital markets to finance individual mortgages around the country.

In the four years since the FHFA established the conservatorships of Fannie Mae and Freddie Mac, we have made significant strides toward maintaining a functioning mortgage market, keeping borrowers in their homes, and remediating the problems that led to the GSEs being placed in conservatorship.

But there is still so much to be done. Today, the government touches more than nine out of every 10 mortgages. In practical terms, this means that taxpayers are accountable for 90% of mortgages in this country. It is imperative that we work to transition the mortgage market to a more secure and sustainable and competitive model.

The conservatorships were never intended to be a long-term solution. Coming as they did just two months before our last presidential election, the conservatorships were meant primarily as a ‘time out’ for the rapidly eroding mortgage market – an opportunity to provide some stability while Congress and the administration could figure out how best to address future reforms to the housing finance system. It is vital to the long-term health of our country's housing and financial markets that Congress and the administration seek to bring the conservatorships to a conclusion and to define the government's role and requirements for housing finance in the future.

Edward DeMarco is acting director of the Federal Housing Finance Agency. This article is adapted and edited from remarks delivered on Sept. 10 before the North Carolina Bankers Association's American Mortgage Conference in Raleigh, N.C. The original text is available online.


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