The Federal Housing Finance Agency (FHFA) has begun the process of restructuring the housing finance system and will soon be releasing multi-year targets for reducing the footprint of government-sponsored enterprises Fannie Mae and Freddie Mac, FHFA Acting Director Edward DeMarco told attendees of the Mortgage Bankers Association's annual conference in Washington, D.C., on Monday.
‘Over the past five years in which Fannie Mae and Freddie Mac have been in conservatorship, much has been accomplished,’ DeMarco said during his keynote at the conference. ‘The nation's secondary mortgage market has continued to function, the GSEs' financial positions have stabilized and we have made significant progress resolving the pre-conservatorship book of business.’
In addition, the GSEs have played an important role in providing foreclosure prevention and refinancing options to hundreds of thousands of distressed borrowers, DeMarco said.
However, the time has come to start implementing the FHFA's strategic plan to wind down the GSEs and bring private capital back into the mortgage market. That plan, which was introduced last year, consists of three main parts: building a new infrastructure for the secondary mortgage market; reducing the GSEs' dominant presence in the marketplace while simplifying and shrinking their operations; and maintaining foreclosure prevention activities and credit availability for new and refinanced mortgages.
Still, the big unanswered question is when Congress will take action to wind down the GSEs and take them out of conservatorship.
Because the political and policy challenges of building a new secondary market are ‘numerous,’ DeMarco said, the ‘timing of broader housing finance reform remains uncertain.’
Nevertheless, the FHFA is taking the first big steps in the process by implementing measures to reduce the GSEs' dominance. This includes fostering risk-sharing transactions, which will reduce taxpayers' long-term risk exposure.Â
‘We set a 2013 scorecard target for each enterprise to achieve $30 billion in risk-sharing transactions using multiple types of structures,’ DeMarco said. ‘Both enterprises are on track to meet this target, and the transactions completed to date have been well-received by the market. We are planning for the scope and depth of risk-sharing transactions to continue to expand.
‘While these transactions and structures are very positive, they do rely on the underlying infrastructure of the enterprises,’ he added. ‘Going forward, I expect to see work done on other types of transactions, such as senior/subordinated structures for certain portions of the enterprises' mortgage guarantees. These alternative approaches will contribute to our efforts to build for the future by helping to develop a securitization infrastructure that is less reliant on the enterprises' traditional government-sponsored enterprise securitization model.’
To help boost more private-market participation, the FHFA is also facilitating an increase in guarantee fees (g-fees), which have already more than doubled since Fannie and Freddie were placed into conservatorship.
‘A key reason to increase guarantee fees is to bring the pricing for credit risk closer to what would be required by private sector providers,’ DeMarco explained. ‘While that level is difficult to evaluate with precision, I believe we are getting closer to a level that would encourage more private sector participation, and we plan to continue pursuing gradual guarantee-fee increases in the near future.’
Another, somewhat more controversial, measure to increase private sector participation and reduce taxpayer exposure is through a reduction in the maximum size of loans that the enterprises guarantee. DeMarco pointed out that in August, President Obama ‘specifically endorsed a gradual reduction in maximum loan size.’
‘Since then, there has been much discussion about a near-term reduction in the loan limits,’ DeMarco said.
‘As you also probably know, last week I made clear that I understood the potential timing issues associated with such a change given the other regulatory changes that are scheduled to take place in the mortgage market. As a result, the FHFA will follow its practice of announcing the 2014 conforming loan limits in late November, at which time further information will be provided on potential reductions in the size of loans the enterprises will guarantee going forward,’ he said.
DeMarco stressed that, moving forward, industry stakeholders will receive six months' advance notice from the FHFA on any future decisions to reduce loan limits. Also, reductions would be implemented nationally – and gradually.