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Cordray, Watt: Mortgage industry matures to meet new regulatory framework

It’s been a tough road, but the changes are working and more to come

A meeting between the heads of the Consumer Financial Protection Bureau and the Federal Housing Finance Agency turned into a preview for the 2016 FHFA Scorecard — with a look at the status of the Common Securitization Platform and Single Security, the move towards increasing credit risk transfers.

FHFA Director Mel Watt said these are multiyear initiatives that will change the way the GSEs issue securities and make the housing finance market more efficient.

“These initiatives may also change how private companies issue securities in the future, since we have committed to using technology that will make the CSP adaptable for use by other secondary market participants,” Watt said. “During the course of this year, we have worked to build and test an increasing amount of the operations and architecture of the CSP.”

"Another long-term priority for FHFA is our work with Fannie Mae and Freddie Mac to transfer credit risk to the private sector through various financial transactions. This initiative ensures that the private sector continues to assume meaningful credit risk, with the Enterprises remaining as backstops to cover catastrophic risk. Since 2013, the Enterprises have transferred a significant portion of credit risk on single-family mortgages with a total unpaid principal balance exceeding $700 billion.

"Both Fannie Mae and Freddie Mac are on track to exceed our 2015 Conservatorship Scorecard credit risk transfer objectives by comfortable margins.

"As the enterprises have gotten these risk transfer transactions up and running, we have been strategic about which loans to target. Instead of using a random sample of enterprise loans, we have targeted new loan purchases with the greatest credit risk,” Watt said. “The targeted loans include new acquisitions of 30-year fixed-rate mortgages that have loan-to-value ratios exceeding 60%, excluding HARP refinances. The Enterprises are currently transferring significant credit risk on approximately 90% of these targeted loans, the bread and butter of their single-family purchases. This approach has made the transactions easier to scale up and more economical, with the Enterprises and taxpayers getting a greater bang for their buck.”

The big piece of the pie that everyone is talking about at the MBA Conference is expanding access to credit, only to do it safely and sustainably.

“As we continue to explore innovative CSP, Single Security and risk transfer initiatives, let me assure you that we have not lessened our conservatorship efforts to improve market liquidity by exploring ways to improve access to credit for creditworthy borrowers,” Watt said.

“Last year, I spoke to you about the important clarifications that FHFA and the Enterprises were making to the life-of-loan exclusions in the Representations and Warranties Framework, and I announced that FHFA had authorized the Enterprises to launch a 3% down payment product offering. Both of these measures were carefully designed to move the needle on access to credit for responsible borrowers without jeopardizing the safety and soundness of the Enterprises, and both of these measures are now being implemented responsibly and successfully.”

In 2015, FHFA also continued to pursue other efforts to provide clarity and transparency on Enterprise practices.

“The Federal Housing Finance Agency faces a number of challenges in our role as regulator of the Federal Home Loan Banks and our role as regulator and conservator of Fannie Mae and Freddie Mac,” Watt said. “We have found that substantial new thinking and innovation will be required in all aspects of the housing finance market to meet the needs of both homeowners and the growing number of renters struggling to afford housing. I hope these comments have provided some insight into our thinking as we approach 2016.”

CFPB Director Richard Cordray spoke about his agency’s history and where they are now. He covered ground from the initial grappling with the industry to the new TILA-RESPA Integrated Disclosure rule, its latest push on Marketing Services Agreements and the evolving Home Mortgage Disclosure Act.

“The Consumer Bureau is here to work with the Mortgage Bankers Association and its members to ensure that consumers’ experience of the financial marketplace and the promise of the American Dream are one and the same,” Cordray said. “The rules we put in place in January 2014 were an important first step. As I have already noted, they secured sensible underwriting practices, such as documenting income to ban NINJA loans (as you recall, loans made even when there was no income, no job, and no assets) and so-called ‘liar loans.’ 

"They also do not allow underwriting based on misleading teaser rates rather than the true cost over the life of the loan. And they addressed some of the worst practices by mortgage servicers.”

Cordray said that the mortgage market has experienced dazzling changes in the past decade.  

It has gone from being the “overheated, increasingly irresponsible market that blew up the largest economy in the world, to retrenching dramatically into an overly tight and restrictive market where many good, creditworthy applicants cannot qualify for reasonable loans.” 

“Lack of effective regulation that fostered a race to the bottom in underwriting standards has been replaced by strong new rules designed to protect and support both consumers and responsible businesses,” Cordray said. “ The result is a mortgage market that is steadily recovering, with home values increasing in many areas and millions of homes emerging from their previous underwater status.”

He also emphasized that the CFPB isn’t just focused on lenders, but also vendors.

“Even so, it has become apparent that the implementation process was not as smooth as we would have hoped,” Cordray said. “Quite frankly, I have been disturbed by reports I have been hearing about the vendors on whom so many of you rely. Some vendors performed poorly in getting their work done in a timely manner, and they unfairly put many of you on the spot with changes at the last minute or even past the due date. 

“It may well be that all of the financial regulators, including the Consumer Bureau, need to devote greater attention to the unsatisfactory performance of these vendors and how they are affecting the financial marketplace,” Cordray said.

He credited MBA and other responsible parties in the industry for working with CFPB to make these changes possible. 

“It has been a difficult decade, but MBA members have joined us in our efforts to make the marketplace fairer and more transparent for all Americans.  Change is never easy, and adversity always presents a test of strength, but you have risen to the challenge, and we appreciate all of your extensive efforts to get it right,” Cordray said. “Together we are building a more solid foundation so that you can thrive and so that families across the country can make the American Dream their reality.”

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