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Remarks as Prepared for Delivery
Melvin L. Watt, Director
Federal Housing Finance Agency
Mortgage Bankers Association's Annual Convention and Expo 2015
San Diego, CA
October 19, 2015
Thank you for that introduction and for inviting me back to your annual convention again this year. It's a pleasure to be here with Secretary Castro and Director Cordray.
At the Federal Housing Finance Agency (FHFA), we place a high priority on engaging with a broad cross section of stakeholders, including the Mortgage Bankers Association and its members, about the Federal Home Loan Banks (FHLBanks) and about Fannie Mae and Freddie Mac (the Enterprises). This dialogue has been especially important as FHFA continues to manage and oversee the Enterprises, which are now into their eighth year of conservatorship. I hope all of you share our view that this dialogue is mutually beneficial.
To further our ongoing conversation, I'd like to update you today about some of the things we've been doing since I spoke to you last year and give you an idea of where we expect to head on some key initiatives in 2016. I believe you will find that these comments underscore our commitment to continue to innovate as we strive to accomplish our statutory mandates to, among other things, foster liquidity and efficiency in the housing finance markets and to do so in a safe and sound manner.
Common Securitization Platform and Single Security
Let me begin with our work to build the CSP and develop the Single Security. These are both big multiyear initiatives that will change the way the Enterprises 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.
During the course of this year, we have worked to build and test an increasing amount of the operations and architecture of the CSP. At the center of this work is Common Securitization Solutions (CSS), LLC, which is the Fannie Mae and Freddie Mac joint venture that is now responsible for developing and running the CSP. In 2015, CSS released updated software to the Enterprises to further their testing processes. In addition, an Industry Advisory Group of stakeholders has started having formal meetings with the Enterprises and CSS. We believe that this is an invaluable forum for feedback and discussion about the CSP and Single Security.
During 2015, we have also worked to define the parameters of the new Single Security. The progress report we issued earlier this year provides important details about how the Single Security will look and operate. I encourage each of you to read this report if you have not already done so and to continue to provide your input as we work aggressively to move this initiative across the finish line.
We recently announced that the CSP and Single Security efforts will be launched in two stages. In the first stage, which we are calling Release 1, the CSP will begin issuing and administering only Freddie Mac's securities. In the second phase, Release 2, the CSP will begin issuing and administering securities for both Enterprises and will do so using the new Single Security for the first time.
We realize that there is a degree of impatience and a desire to see all these efforts completed right away. While I'm not in a position to give you specific dates right now, I can confirm that we plan to announce the Release 1 timeline in 2016. We also hope to be able to announce the Release 2 timeline next year. When we do announce the Release 2 timeline, rest assured that we will meet our commitment to provide at least one year of advance notice before any go live date.
Meeting both of these objectives will require continued testing and sustained progress of the kind we have had to date. It will also require much more dialogue between CSS, the Enterprises, FHFA and multiple other stakeholders. We share your sense of urgency, and I assure you that we are moving expeditiously, but responsibly, to launch the CSP and the Single Security.
Credit Risk Transfer Transactions
Another long-term priority for FHFA is our work with the
Enterprises 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. The targeted loans include new acquisitions of 30-year fixed-rate mortgages that have loan-to-value (LTV) ratios exceeding 60 percent, excluding HARP refinances. The Enterprises are currently transferring significant credit risk on approximately 90 percent 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.
As part of our next steps, we want to refine and further standardize the Enterprises' debt, reinsurance and upfront offerings. This will help broaden liquidity. We will continue to work with the Enterprises on other innovative transaction types, such as credit-linked notes. We will also aggressively continue our work to analyze, assess, and define upfront credit risk transfers. We are committed to engaging stakeholders as part of this process.
While a great deal has been accomplished in a short time, it is still early in the development of the risk transfer market. FHFA and both Enterprises are committed to building on our recent progress, and we view credit risk transfers as a key part of Fannie Mae and Freddie Mac's credit guarantee business going forward.
Access to Credit
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. 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 percent 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, we also continued to pursue other efforts to provide clarity and transparency on Enterprise practices. Earlier this month, the Enterprises published guidance that for the first time defines severity levels for loan origination defects and establishes a process for lenders to correct or remedy those defects to the extent practicable. This new approach calibrates the severity of a defect with the remedy and results in only the most serious defects raising the possibility of a loan repurchase.
The Enterprises also anticipate releasing updated guidance on servicing remedies by the end of this year. These clarifications will provide servicers with more transparency on the types of remedies available for servicing breaches and will specifically identify the limited circumstances that would trigger a loan repurchase.
The Enterprises are also continuing their work to develop an independent dispute resolution program to be used to resolve contested disputes about repurchase requests. Fannie Mae and Freddie Mac completed a pilot of their independent dispute resolution program design over the summer, and they are now completing assessments of the pilot to inform the final program design.
An effort that will not be completed this year but will carry over into next year is the work that has been taking place about possible appraisal-related representation and warranty relief. Both Enterprises have developed tools that provide lenders feedback about appraisal quality and are now using these tools in independent pilots to assess the feasibility of representation and warranty relief on the value of collateral. These pilots are in their very early stages. But throughout 2016, we will continue our efforts to provide as much certainty on appraisal-related issues as is possible.
Each of these efforts is intended to provide more certainty to lenders and to do so in a way that is safe and sound for the Enterprises. We anticipate that greater certainty will translate into fewer credit overlays, lower costs for borrowers, and greater access to credit for creditworthy borrowers. As I said last year, we expect this to be a two-way street. FHFA will continue to do what we can to provide certainty and thereby reduce the unintended consequences that follow from uncertainty in the market. But, we are looking for lenders in return to take the necessary steps to serve creditworthy borrowers who are currently sitting on the sidelines.
Affordable Rental Housing
While access to mortgage credit and homeownership are critically important, we also remain focused on Fannie Mae and Freddie Mac's role in supporting liquidity in the multifamily market, and we are especially focused on their roles in support of affordable rental housing. Households across the country are paying more and more of their income toward rent. Half of all renters now spend more than 30 percent of their income on housing and 26 percent of renters spend more than 50 percent. Both of these are sharp increases over the last decade, and we expect these challenges in the rental market to continue.
Each Enterprise utilizes a different multifamily business model that supports rental housing affordability while also sharing significant credit risk with the private sector. The Enterprises offer affordable, long-term, fixed-rate loans that enable property owners to have a stable, sustainable mortgage payment and reduce the need to increase rents charged to tenants. Over 70 percent of rental units financed by the Enterprises over the last few years have been affordable to low-income households.
The Enterprises' multifamily programs benefit from strong underwriting standards and correspondingly strong performance, which they sustained throughout the economic crisis. Because of the credit risk these programs transfer to the private sector, taxpayers are well shielded from losses on Enterprise-supported multifamily loans.
Our annual Scorecard has included a cap on the Enterprises' multifamily lending volume, with exceptions to the cap for certain affordable lending activities. Earlier this year, we broadened the
categories of affordable multifamily lending that were excluded from FHFA's cap. We made these adjustments because the multifamily market grew more rapidly in the first half of 2015 than we had projected and because we wanted the Enterprises to prioritize multifamily purchases of affordable housing.
Looking ahead to next year, FHFA expects to maintain our $30 billion cap for each Enterprise for market rate properties. To avoid the kind of uncertainty we experienced last year, however, we will institute a quarterly review process to make necessary adjustments if the market grows beyond our initial projections.
We anticipate that next year's Scorecard will also maintain the broadened list of exclusions from the cap that we put in place earlier this year. This means that we will continue to exclude from the cap loans for affordable properties, including those in higher-cost areas. We will also continue to exclude certain loans for manufactured housing communities, as well as seniors housing and small multifamily properties affordable to low-income tenants. Beginning in 2016, FHFA expects to add two new exclusions – loans for low-income apartments in rural areas and loans for energy efficiency improvements that meet our eligibility criteria.
Our Scorecard priorities as conservator align with the housing goals regulation we recently finalized for 2015-2017. In most cases, we increased the goals for the number of affordable multifamily units that we expect the Enterprises to support. We also required Fannie Mae and Freddie Mac to meet identical multifamily housing goals for the first time. In light of the strong state of the multifamily market and the need for more affordable units, we believe these goals are both achievable and critical.
In 2016, we also plan to finalize a Duty to Serve rule, which will encourage Fannie Mae and Freddie Mac to innovate responsibly in the areas of affordable housing preservation, housing in rural areas, and manufactured housing. Our re-proposed rule on Duty to Serve is forthcoming, and we look forward to getting feedback from all stakeholders.
Federal Home Loan Banks
Before I conclude, I'm sure a number of you would like for me to say something about the rule FHFA has proposed related to several aspects of
Federal Home Loan Bank membership. Unfortunately, legal constraints prevent me from saying much about this because we are in the period between the end of the comment period and the time we issue the final rule. I can tell you, however, that we have completed our review of the 1,300-plus comments submitted on the proposed rule, and we are making a concerted effort to finalize the final rule by the end of this year and, if not, certainly within the first quarter of 2016.
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. 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. My remarks today have touched on only a few of the initiatives we are undertaking to meet these challenges. But I hope these comments have provided some insight into our thinking as we approach 2016.
Thank you again for inviting me to be here today.
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