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Prepared Remarks of Melvin L. Watt at the North Carolina Bankers Association’s American Mortgage Conference


​Prepared Remarks of Melvin L. Watt
​Director, Federal Housing Finance Agency

At the North Carolina Bankers Association's​​ American Mortgage Conference

​September 8​, 2014


Thank you for inviting me to be here with you in Raleigh this evening, and thank you for that introduction.

I've had a busy year, and the Federal Housing Finance Agency (FHFA) has had a busy summer.  I spent a lot of time early on building a top-notch team of Advisors, getting to know the very qualified staffs I inherited at FHFA, Fannie Mae, Freddie Mac and the Federal Home Loan Banks.  I have also spent a lot of time trying to move the mortgage finance markets back to more normalized and predictable certainty, by trying to get to know the leaders, resolve pending litigation and move toward a more satisfactory representation and warranty framework. 

And, this summer, I'm sure that many of you have noticed, FHFA has requested feedback on five key issues over the last few months, which,  taken together, address both our conservatorship strategic goals for Fannie Mae and Freddie Mac and our responsibilities as regulator of Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System.  In June, we urged stakeholders to submit feedback on guarantee fee levels for Fannie Mae and Freddie Mac (together "the Enterprises").  In July, we asked for input on eligibility requirements for the Enterprises' private mortgage insurer counterparties.  In August, we released a proposed Single Security structure, which we hope will generate stakeholder responses and discussion about this approach.  In August, we also issued a proposed rule on the Enterprises' housing goals for 2015 through 2017.  And last week, we put out a proposed rule to update and clarify certain aspects of Federal Home Loan Bank (Bank) membership requirements. 

With all of these requests and notices, I'm guessing that we've been now keeping many of you quite busy, but I want to underscore the importance of receiving your feedback.  To further this ongoing dialogue, today, I'd like to highlight some issues and next steps for each of the five releases I just mentioned. ​

Today is the deadline for public feedback on our requests for input about guarantee fees and private mortgage insurance.  One of the first decisions I made as Director of FHFA was to suspend increases in guarantee fees that had been announced by FHFA in December of 2013.  Given the impact of these fees on the Enterprises, the housing finance markets, and on borrowers, I believed that it was critical to evaluate this issue and to get feedback from stakeholders.  After additional work at FHFA, we issued a Request for Input that provides further details on how the Enterprises set these fees.  The request also posed a number of questions to prompt substantive feedback about how guarantee fee levels affect various aspects of the mortgage market.

FHFA has also continued to advance efforts to strengthen Fannie Mae and Freddie Mac's counterparty requirements for private mortgage insurers.  When a borrower makes a down payment of less than 20 percent, these mortgages are required by statute to have some private capital standing behind the loan in order to qualify for purchase by Fannie Mae or Freddie Mac.  Private mortgage insurance has always played an important role in meeting this requirement and, as the recent crisis revealed, it is critical to make sure that this coverage is available in both good times and in bad times.  To this end, FHFA released a Request for Input on draft Private Mortgage Insurer Eligibility Standards.  Our objective is to have the Enterprises strengthen their risk management by enhancing the financial, business and operational requirements in place for their private mortgage insurer counterparties.

Moving forward, FHFA will review and consider the input we have received as part of our comprehensive evaluations of the guarantee fee and the private mortgage insurance issues.  Consistent with our statutory mandates, our assessments and policy decisions will take into account both safety and soundness considerations and possible impacts on access to credit and housing finance market liquidity.  While we understand that these topics are inter-related, which is why we decided to align the submission deadlines, I do want to note that FHFA expects to proceed with separate decisions on these topics after completing our evaluations. 

Let me move on to discuss the recent Request for Input on the Proposed Single Security Structure.  FHFA is in the early stages of developing a Single Security, and we released this request to facilitate robust discussions and input from all stakeholders and the public. 

In working toward a Single Security, there are four aspects of the proposed structure that I want to highlight.

First, FHFA's top priority in pursuing the Single Security is to deepen and strengthen liquidity in the housing finance markets.  This is a technical topic, but getting this right will have real world benefits for the markets and for borrowers.  An effective Single Security will support a more liquid "to-be-announced" (TBA) market for mortgage-backed securities.  Borrowers may not understand what the TBA market is or how it works, but the forward-trading that takes place in TBA securities means that borrowers can get a mortgage rate locked-in when they are house hunting.  The TBA market also adds efficiencies to the process, which reduces transaction costs and results in lower mortgage rates for borrowers.  We believe a Single Security can enhance these benefits and further strengthen market liquidity by reducing the trading disparities between Fannie Mae and Freddie Mac securities.   

Second, we propose leveraging the existing security structures used by the Enterprises for the Single Security.  This would avoid designing a structure from scratch and we hope this approach will give market participants and investors a sense of familiarity with the way the Single Security would operate and perform.  In the proposal, the Single Security would use many of the security features in Fannie Mae MBS and the disclosure regime used by Freddie Mac PCs. 

Third, FHFA's proposal also focuses on the importance of making Fannie Mae and Freddie Mac's existing securities equally interchangeable with the future Single Security.  This is essential to meet our goal of developing a more liquid housing finance market.  Without sufficient market flexibility allowing investors to trade between legacy securities and future Single Securities, current market liquidity could be impacted.  Under our proposal, we believe that market participants will likely view legacy Fannie Mae and Freddie Mac securities as interchangeable with a Single Security.  This approach should facilitate equal treatment between Fannie Mae and Freddie Mac legacy securities.  Getting feedback on this approach is critical to our success moving forward.  

The fourth point I want to touch on is about the agency's timing for the development of a Single Security.  Our proposal states this several times, but I want to emphasize that FHFA's proposed structure and request for input is the first-step in a multi-year process.  We understand that there are a number of moving parts between the present and a future implementation date, and we understand that this process will take time.  As our immediate next steps, FHFA will work with the Enterprises to process the feedback we receive and we will move forward in a deliberative and transparent manner.  FHFA will continue to produce progress reports that include Common Securitization Platform and Single Security updates where appropriate.

The next two priority areas involve FHFA's responsibilities as regulator of Fannie Mae, Freddie Mac and the Federal Home Loan Banks. 

First, at the end of last month, FHFA proposed a rule for Fannie Mae and Freddie Mac's housing goals for 2015 through 2017.  This rulemaking is a statutory requirement set forth in the Housing and Economic Recovery Act, and the comment period is open for a sixty-day window through the end of October.  We know that challenges exist in today's housing market that make it difficult for many lower-income families to access mortgage financing or to find an affordable apartment to rent.  Fannie Mae and Freddie Mac do not originate mortgages themselves, but the housing goals measure the number or percentage of Enterprise mortgage purchases that provide homeownership and affordable rental housing opportunities for these families.  I hope that all of you take a close look at our proposed rule and the questions it raises about how best to set Fannie Mae and Freddie Mac's housing goals to encourage responsible lending that is done in a safe and sound manner and serves the single-family and rental housing needs of lower-income families.

For the housing goals that focus on affordable single-family mortgages, FHFA is asking for feedback on three alternative ways to set these goals.  Alternative 1 would use a combination of forward-looking benchmarks coupled with a retrospective analysis of how the overall market performed in a given year.  Alternative 2 would use only the forward-looking benchmark and Alternative 3 would rely solely on the retrospective market analysis.  There are advantages and disadvantages to each of these, and we hope to receive robust feedback from commenters to aid the agency in making a decision among these alternatives in the final regulation.

On the goals that address affordable rental units in multifamily buildings, FHFA has asked for comments on creating a new category for small multifamily properties that have apartments affordable to low-income families.  Units in these smaller apartment buildings can be an important source of affordable rental housing, but the Enterprises have had limited purchases in this market segment in recent years.  Our proposed rule would create a new subgoal to provide transparency about Enterprise activity in this area, but, in an effort to take a gradual approach, we have proposed relatively low benchmarks.  

Just after Labor Day, FHFA also released another proposed rulemaking involving membership requirements for the Federal Home Loan Banks.  I am aware that the proposed rule has generated significant discussion within the industry, and I encourage stakeholders to submit their views during the comment period.  In our role as regulator, FHFA has a responsibility to ensure that the Banks are fulfilling their mission to support housing finance and that they are doing so in a safe and sound manner that complies with their statutory requirements.  To further facilitate this mission and demonstrate that members are engaged in housing finance, FHFA has proposed requiring Bank members to demonstrate ongoing mortgage lending activity instead of a one-time test used when an institution applies for membership. 

In addition, FHFA has proposed clarifying the definition of insurance company in such a way that captive insurers would no longer be eligible for Bank membership.  While captive insurers may, in some cases, be involved in housing finance, their access to the Federal Home Loan Bank System raises a number of concerns that are discussed in the proposed rule.  We look forward to receiving your comments on both of these topics.     

I hope that my comments today have helped frame some of the issues that we are currently evaluating at FHFA.  As I have mentioned throughout my remarks, FHFA will consider the feedback we receive from stakeholders as part of our further evaluation of these five policy areas.  Of course, as we conduct these evaluations and proceed with our decision-making process, FHFA will continue to balance its mandates of ensuring safety and soundness and ensuring broad liquidity in the housing finance markets.  ​

Thank you again for inviting me to be here this evening, and I look forward to our ongoing dialogue on these important matters.  




​Corinne Russell (202) 649-3032 / Stefanie Johnson (202) 649-3030

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