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Director Watt: FHFA won't shrink GSE footprint

Affordable mandate, expanded credit boxes

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In his first major public address, FHFA director Mel Watt said that the agency will not be directing Fannie Mae and Freddie Mac to lower limits for the mortgages they back, and the agency will focus more on affordability, loosening credit standards, and expanding access to credit, and less on what direction GSE reform takes.

“This decision is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market,” Watt said, speaking at the Brookings Institution in Washington on Tuesday.

Watt started by acknowledging that he has been conspicuously absent from the housing discussion despite being sworn in Jan. 6.

He said that the Federal Housing Finance Agency needs to focus on the statutory environment as it stands, rather than trying to influence the direction of GSE reform efforts, even though he agrees some type of GSE reform needs to happen.

Watt said he would rather work on changing the focus of FHFA to affordable housing goals under the current structure.

Among other policy announcements:

  • Watt said he was putting an end to the proposal by his acting predecessor to lower the maximum size of loans the GSEs can buy from the current cap of $417,000 in the majority of housing markets.
  • The FHFA won’t be expanding eligibility or time limits for the Home Affordable Refinance Program.
  • The GSEs will also be directed to expand their credit boxes
  • The GSEs will be allowed to extend waivers to lenders that would allow them to avoid the cost of put-backs.

"I don’t think it’s FHFA’s role to contract the footprint of Fannie and Freddie," Watt said.

Watt said the FHFA has three goals: maintain, reduce and build.

“MAINTAIN, in a safe and sound manner, foreclosure prevention activities and credit availability for new and refinanced mortgages to foster liquid, efficient, competitive and resilient national housing finance markets,” Watt said.  “Our first strategic goal, maintain, requires Fannie Mae and Freddie Mac to carry out and strengthen, where possible, three aspects of their core business operations.

“First, we expect them to take actions that improve liquidity in the present single-family housing finance market. Second, we believe they should continue to improve servicing standards and foreclosure prevention actions. Third, we think they have a critical ongoing role in the multifamily sector, particularly for affordable multifamily properties,” Watt said. 

Across these three areas, Watt said, the overriding FHFA objective is to ensure that there is broad liquidity in the housing finance market and to do so in a way that is safe and sound.

“The maintain goal is not a new one for the agency, but we are placing an increased emphasis on it. We are leading with maintain as the first goal in our Strategic Plan and Scorecard. We have also doubled the Scorecard weight given to this goal, from 20% to 40%,” he said.

FHFA’s second strategic goal, REDUCE, is focused on ways to bring additional private capital into the system in order to reduce taxpayer risk. 

Watt said that the GSEs have been directed to transfer more risk and to reduce their retained portfolios.

“We have reformulated this goal so that it no longer involves specific steps to contract the Enterprises’ market presence, which could have an adverse impact on liquidity. Instead, the reduce goal focuses on ways to scale back Fannie Mae and Freddie Mac’s overall risk exposure,” Watt said. “This approach allows us to meet our mandates of upholding safety and soundness and ensuring broad market liquidity.

“While FHFA has reformulated this strategic goal, our strategies to reduce taxpayer risk build on much of FHFA’s past work in this area. This includes having Fannie Mae and Freddie Mac conduct additional credit risk transfers for their single-family credit guarantee business. These transactions have opened up private capital to share in credit losses, which protects taxpayers from bearing all of the potential losses,” Watt said.

“Our 2014 Scorecard requires each Enterprise to triple the amount of risk transfers in 2014. This will be an increase from $30 billion of unpaid principal balance transfers last year to approximately $90 billion in 2014. On top of increasing the amount of credit risk transferred, we also expect each Enterprise to try new risk transfer structures to assess sustainability in different market conditions,” he said. 

“In addition, we are requiring ongoing reductions in the Enterprises’ retained portfolios. The Senior Preferred Stock Purchase Agreements with the Treasury Department require the Enterprises to reduce their portfolios to no more than $250 billion each by 2018. Fannie Mae and Freddie Mac must develop plans to meet this target even under adverse market conditions. We are also requiring them to prioritize selling their less liquid assets to reduce risk and take advantage of current investor interest.  As their portfolios continue to decline, they are transferring interest rate risk and liquidity risk from these portfolios to the private sector.”

FHFA’s final strategic goal is to BUILD a new infrastructure for the Enterprises’ securitization functions. 

“The core of this effort is the Common Securitization Platform and I want to talk about two aspects of this today,” Watt said. “First, after extensive discussion within FHFA and with the Enterprises, we have clarified that the agency’s top objective for the Common Securitization Platform is to make sure that it works for the benefit of Fannie Mae and Freddie Mac. Over the last four months, we have identified the risks involved in transitioning to a Common Securitization Platform and reviewed how to manage those risks. We found that, because of the many variables involved, the main danger to the CSP effort would be pursuing too many objectives all at the same time. 

“Since any stumbles along the way could have ripple effects in the $10 trillion housing finance market, there’s a lot at stake in getting this right.  As a result, our decision has been to “de-risk” this project,” he said. “Moving forward, we will focus our efforts on creating a Common Securitization Platform that can undertake Fannie Mae and Freddie Mac’s current securitization operations.”

Watt concluded saying that he hoped he’d provided a clear sense of direction for the enterprises’ ongoing conservatorships. 

“Implementing these objectives will require ongoing analysis, evaluation and input.  FHFA will proceed with these steps in a transparent way that incorporates the feedback of the public and stakeholder groups whenever possible,” he said.

The full text of Watt's speech can be read here.

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