| The regulator of Fannie Mae and Freddie Mac wants the two firms to jointly create a utility-like company that provides a securitization platform for both agency and non-agency loans. He indicated that guarantee fees will continue increasing while multifamily activity declines, and he noted how some real estate markets are lagging others.
Federal Housing Finance Agency Acting Director Edward J. DeMarco is cautiously optimistic about the recovering real estate market and credited Federal Reserve actions for low interest rates that have contributed to the recovery. The regulator highlighted markets like Florida, New Jersey and New York — where “extremely” slow foreclosure timelines are measured in years instead of months and home price improvements are lagging the rest of the country. While a backlog of shadow inventory has accumulated in these markets — a “perverse” situation has developed where new home building permits were higher last year. His comments were made Monday at the National Association for Business Economics 29th Annual Economic Policy Conference in Washington, D.C., according to a copy of his prepared statement. DeMarco pointed to a number of factors that were responsible for the housing crisis. “I could spend a considerable amount of time going through the issues that led to the collapse of the housing market,” the FHFA chief said. “There were certainly issues with relaxed credit standards, the level of regulatory oversight, lack of market discipline, lack of transparency and borrowers overextending their credit positions.”
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sketch of Edward J. DeMarco by Stephen McConnell
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A new multi-year strategic plan for Fannie and Freddie laid out by DeMarco includes reducing their collective market share and maintaining the availability of foreclosure prevention activity and refinancing programs.
Guarantee fees at the housing finance agencies doubled last year to around 50 basis points as their pricing was brought more in line with the private sector. DeMarco plans to continue increasing G-Fees this year and hopes that at some point, the higher pricing will help accelerate the return of private capital to the mortgage market.
While the initial target of reducing the two firms’ retained portfolios was 10 percent a year in the Senior Preferred Stock Purchase Agreements, the agreements were subsequently modified to increase the annual reduction to 15 percent. But now, left with less liquid, non-agency investments, the annual reduction will be cut to 5 percent.
FHFA said that one priority is to update master mortgage insurance policies and formulate eligibility standards, which will maintain credit availability and strengthen and clarify standards to increase the reliability of this form of credit enhancement.
Another priority is to develop a set of aligned standards for force-placed insurance that applies beyond Fannie and Freddie loans and enables greater regulatory coordination in considering the various issues related to forced-placed insurance.
This year’s strategic plan also includes building a new infrastructure for the secondary market. DeMarco acknowledged that the secondary lenders’ proprietary infrastructures are outmoded and would need to be updated in a way that provides enhanced value to the mortgage market.
But “the enterprises’ infrastructures are not the most effective platforms when it comes to adapting to market changes, issuing securities that attract private capital, aggregating data, or lowering barriers to market entry,” DeMarco said.
He described a new infrastructure that avoids double-charging taxpayers, provides benefits beyond the enterprise business model and is operable across many platforms for use by any participating issuer, servicer or other party.
The development of a common securitization platform was originally outlined in an October 2012 white paper from the FHFA.
“One of the most important issues we raised in the white paper was the scope of the securitization platform,” DeMarco said. “One approach we outlined is that the focus of the platform could be on functions that are routinely repeated across the secondary mortgage market, such as issuing securities, providing disclosures, paying investors, and disseminating data. These are all functions where standardization could have clear benefits to market participants.
In order to move forward with the establishment of a common secondary mortgage market infrastructure, a new business entity will be established this year by Fannie and Freddie. Instead of rebuilding the proprietary infrastructures of Fannie and Freddie, the new entity would function like a utility company with a separate chief executive officer and chairman of the board who are independent from the pair of government-sponsored enterprises.
FHFA plans on instituting a formal structure to allow for input from industry participants at the new entity, which will initially be owned and funded by Fannie and Freddie.
“However, the overarching goal is to create something of value that could either be sold or used by policy makers as a foundational element of the mortgage market of the future,” DeMarco stated. “We are designing this to be flexible so that the long-term ownership structure can be adjusted to meet the goals and direction that policymakers may set forth for housing finance reform.”
DeMarco noted that while Fannie and Freddie’s share of the multifamily financing market was elevated during the financial downturn, last year’s share was more normal. Since the multifamily market is less dependent on the government-controlled enterprises, FHFA plans to target a 10 percent reduction this year in multifamily activity through increased pricing, more limited program offerings and tighter underwriting standards.
