The goals released for both Fannie Mae and Freddie Mac by the Federal Housing Finance Agency are considered by analysts at Compass Point Research & Trading to represent a meaningful indication of the conservator and regulator's intent to shift credit risk away from the government-sponsored enterprises, according to a note from the research firm.
Compass Point believes the most shocking element of the FHFA’s release was its stated intent to shrink both Fannie Mae and Freddie Mac’s new multifamily business, specifically the "unpaid principal balance amount of new multifamily business relative to 2012 by at least 10% by tightening, underwriting, adjusting pricing and limiting product offerings, while not increase the proportion of the enterprises’ retained risk."
During the crisis, the multifamily line of business was effectively the GSE's "diamond in the rough," generating approximately $7 billion in profits between 2008 and the third quarter of 2011, compared to the $208 billion in total losses of the GSE’s single-family business during the same period, Compass Point said.
"This decision seems inconsistent with broader policy priorities in D.C. to support multifamily housing while the single-family market continues to heal," the research firm added. "We expect this particular element of the FHFA’s scorecard to face a significant amount of pushback from lawmakers on Capitol Hill."
The FHFA also outlined two primary goals in a press release, scorecard and an accompanying speech from current acting director Ed DeMarco. Those goals included efforts to shrink the GSE's footprint in the housing market and revamping the secondary mortgage market's future structure.
"While there will be some progress on the framework of GSE reform in the House Financial Services Committee this year, we do not envision a scenario where such a proposal would be seriously considered by the Senate. For that reason, the FHFA's priorities remain critical in assessing the future of housing finance," Compass Point noted.
Furthermore, Compass Point pointed out that the goals outlined in the release as well as DeMarco’s speech are not binding mandates, but performance targets for GSE executives.
The FHFA also set a target of $30 billion for unpaid principal balance in credit risk sharing transactions this year for both Fannie Mae and Freddie Mac. However, the parties will not receive any credit for risk-sharing agreements below $10 billion and only partial credit for agreements between $10 billion and $30 billion in UPB, according to Compass Point.
Furthermore, Compass Point stated that DeMarco’s speech reinforced the belief that there is currently not a single, unified path to risk sharing. Additionally, DeMarco said that he projects "multiple types of risk sharing transactions including expanded mortgage insurance; credit-linked securities’ senior/subordinated securities; and perhaps other structures."
"This effort will need to be closely tracked as its components could eventually become central to a more meaningful policy shift," Compass Point suggested.
The headline announcement of DeMarco’s speech was a need for a move back to a mortgage market financed predominately by private capital including the creation of a new business entity between Fannie Mae and Freddie Mac.
The proposed entity would initially be funded, operated and owned by the GSEs with the eventual goal of creating "something of value that could either be sold or used by policymakers as a foundational element of the mortgage market of the future."
"Our assessment of the scorecard shows that the goals for this particular prong of the plan are relatively preliminary at this point in time. Still, given continued political gridlock on Capitol Hill, we believe the FHFA’s goals in this instance could represent the most tangible step towards altering the secondary mortgage framework since the GSEs were put into conservatorship," Compass Point stated.