FHFA Releases Strategic Plan for GSEs; Directs Them to Strengthen Outreach to HFAs

Earlier today, the Federal Housing Finance Agency (FHFA) released its 2014 Strategic Plan for the Conservatorship of Fannie Mae and Freddie Mac. This plan, as well as the Scorecard that the agency will use to evaluate both firms’ performance in meeting the plan’s objectives, outlines the goals and responsibilities FHFA has established for the firms this year. FHFA Director Mel Watt discussed the Strategic Plan in remarks he delivered this morning at the Brookings Institution.

During his speech, Watt said that the Strategic Plan and Scorecard are built around three major goals: maintaining credit availability and foreclosure prevention activities to foster a liquid housing finance market, reducing taxpayer exposure by increasing the role of the private sector, and building a single common securitization platform for use by both Fannie Mae and Freddie Mac that can also be adopted by other secondary market participants. Watt said that these three main goals build on the work of his predecessor, Ed DeMarco, but that new plan includes certain “changes in focus.”

Maintaining Credit Availability

With regard to the first goal, Watt said that FHFA’s “overriding 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.” To this end, FHFA has doubled the weight this goal is given in the Scorecard from 20 percent to 40 percent, making it the largest component of each firms’ score.

The Strategic Plan directs Fannie Mae and Freddie Mac to take several steps to promote liquidity in the single-family market. Notably, both firms are explicitly directed to “build or strengthen relationships” with state or local HFAs, as well as small and rural lenders. The plan praises HFAs’ history of helping low- and moderate-income borrowers secure affordable home loans as well as their “proven, strong performance records.”

In addition, the Strategic Plan also highlights recent changes FHFA has made to clarify and loosen Fannie Mae’s and Freddie Mac’s loan buyback policies. Specifically, lenders will be freed of liability for mortgages with three years of steady payments even if borrowers made two late payments during that time period (previously, no late payments were allowed). In addition, those mortgage loans that pass an underwriting “spot check” by either Fannie Mae or Freddie Mac will also no longer be potentially liable for buybacks. Watt said that FHFA will consider further steps to clarify the quality control and review process for both firms, including establishing an independent dispute resolution a lender can use to challenge and repurchase request and developing alternative methods for certain loan defects to be addressed.

Watt also told the audience that FHFA will not reduce the current Fannie Mae and Freddie Mac loan size limits, arguing that such a reduction could hurt the health of the current housing market. In addition, both firms will continue to guarantee mortgages to borrowers with a debt-to-income ratio above 43 percent as long as borrowers meet other compensating standards.

Watt said that FHFA has decided not to direct Fannie Mae and Freddie Mac to reduce their multifamily lending, as was previously proposed by FHFA under DeMarco, but will instead impose the same production cap as last year. To promote affordable multifamily development, certain properties—including targeted affordable rental housing, buildings with less than 50 units, and manufactured rental housing communities—will not count toward the firms’ caps.

Reducing Taxpayer Risk and Increasing the Role of the Private Sector

In contrast to previous years, this year’s Strategic Plan will not prescribe specific steps for reducing Fannie Mae and Freddie Mac’s presence in the single-family market, which FHFA says could adversely impact credit availability. Instead, the Strategic Plan focuses on reducing the firms’ exposure to risk by requiring them to triple the amount of credit-risk transfers they conduct on their single-family business from $30 billion last year to $90 billion in 2014. Watt argued that this approach will allow FHFA “to meet our mandates of upholding safety and soundness and ensuring broad market liquidity.”

FHFA will also require Fannie Mae and Freddie Mac to continue to sharing risk on multifamily loan with private sector participants. Both firms have done so and enjoyed strong performance throughout the housing downturn.

Building a Common Securitization Platform

The Strategic Plan also calls on Fannie Mae and Freddie Mac to continue to develop a Common Securitization Platform (CSP) that will allow the firms to pool their securitization operations and potentially be used by other participants in the housing finance market. Watt said in his remarks that, after evaluating the risks associated with transferring to a CSP, he feels as if the bulk of the effort should first be focused on making sure the CSP works for Fannie Mae and Freddie Mac.

Watt argued that creating an infrastructure that could be used by the whole market is risky because any flaw in the system could cause irreparable harm. Focusing first on developing a structure that works primarily for Fannie Mae and Freddie Mac will make the product less risky. Watt said he still believes the CSP will eventually be able to meet the securitization needs of other market participants as well.

Guarantee Fees

At the conclusion of his remarks, Watt told the audience that FHFA will release soon a Request For Input on the guarantee fees Fannie Mae and Freddie Mac charge on mortgages they guarantee. Last December, FHFA announced that it would implement a series of guarantee fee increases and adjustments. Watt canceled those adjustments after taking office in early January.