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Remarks as Prepared for Delivery
Melvin L. Watt, Director
Federal Housing Finance Agency
Mortgage Bankers Association Annual Convention and Expo 2017
October 23, 2017
Thank you for inviting me back to speak to the Mortgage Bankers Association (MBA) again this year. I always think of each speech I give at MBA's annual convention as another opportunity to continue our productive dialogue about how to foster a more liquid and efficient housing finance system. Throughout my tenure as Director of the Federal Housing Finance Agency (FHFA), I hope it has not gone unnoticed that the things I have valued most (and have encouraged the FHFA staff to value) are transparency, communication, and collaboration. In every issue and challenge we have tackled (and none of them have been easy), my view has always been that the best way forward has been through honest and open dialogue and through constructive collaboration.
In my first appearance at this convention in 2014, I focused my remarks on FHFA's efforts to revise the Enterprises' representations and warranties framework. Through our conversations with MBA members and other stakeholders, we all had come to the conclusion that revisions to the reps and warranties framework could help reduce uncertainty and that collaborating and finding a viable way to address this uncertainty could help reduce overlays and increase credit access. We all took this on as part of our "shared responsibility" to help creditworthy borrowers get sustainable mortgage loans. I am grateful for your commitment to work with us on this difficult challenge. While it has been a slow and methodical process, I am pleased that we are seeing positive signs that lenders are expanding their use of the Enterprises' credit box and may be showing more flexibility in their own. We continue to have a shared interest in meeting the challenge to ensure that borrowers who can afford a mortgage don't stay on the sidelines and we should continue our collaborative efforts to achieve this objective.
Another area on which we have made, and continue to make, significant progress in collaboration with MBA members and other stakeholders is in our efforts to transfer risk away from taxpayers and to the private sector. The Enterprises' credit risk transfer (CRT) programs have leveraged a receptive private sector market and have made an incredible amount of progress in a really short period of time. The Enterprises now transfer a meaningful amount of credit risk to private investors on at least 90 percent of their targeted, single-family loans. As our latest CRT report shows, since 2013 they have transferred a portion of credit risk on $1.6 trillion of mortgages, totaling $54 billion risk in force. We could not have made this progress without substantial input, cooperation, and investment by industry stakeholders, including MBA members.
The Enterprises and FHFA are, of course, continuing to look at ways to refine and improve credit risk transfer programs in ways that make economic sense and that meet our core principles: attracting more and consistent private capital, reducing risk to taxpayers, and cultivating a diversified and broad investor base.
One change that FHFA is currently evaluating would affect the structure of the Enterprises' CRT debt transactions known as Connecticut Avenue Securities (CAS) transactions for Fannie Mae and Structured Agency Credit Risk (STACR) transactions for Freddie Mac. Under the proposed changes, these transactions would be issued as notes that qualify as Real Estate Mortgage Investment Conduits (REMICs). We believe this change would help broaden the investor base for these transactions and would better align the accounting treatment of when credit risk protection benefits and credit losses are recognized. As we evaluate the tax and legal implications of these potential changes, FHFA and the Enterprises have been consistently engaged in getting feedback from MBA members and other stakeholders about the changes. Again, this is consistent with the collaborative approach we always try to follow as we try to make the best possible decisions.
As I said previously, none of the decisions we make at FHFA are easy decisions and taking into account multiple perspectives, as we always try to do, often makes decisions even more complicated and difficult to reach. One example of this is the challenge we have encountered in reaching a decision about whether to require the Enterprises to use alternative credit scores. I initially thought this decision would be relatively easy to make. After all, we all believe that competition is good, don't we? However, the more we looked into this issue, the more complicated it became and it is turning out to be among the most complicated decisions I have faced during my tenure at FHFA.
To fully analyze whether we should require the Enterprises to update their credit score model requirements – including possibilities that would involve using more than one credit score provider – we've had to look at the issue from multiple angles. For example, do alternative credit scoring models actually increase access to credit by providing credit scores on more borrowers who are credit worthy and able to pay a mortgage? How does this compare with the Enterprises' current ability to evaluate borrowers without a credit score? How do we ensure that competing credit scores lead to improvements in accuracy of credit decisions and not just to a race to the bottom with competitors competing for more and more customers? What would be the implementation and operational costs to the Enterprises, lenders, and other industry participants of converting to an alternative credit score or a multiple-score system? Does the credit repositories ownership of one of the credit score providers present implications for long-term competition in the credit scoring market?
In light of the complicated questions we found we needed to answer, FHFA decided to develop a request for input (RFI) to be released this fall. Through the RFI, we hope to get honest and reliable information and stakeholder feedback on these and other matters relevant to this critically important decision.
Notwithstanding the complexity of these issues and the multiple competing considerations involved in resolving them, FHFA is committed to making a decision about the Enterprises' future credit score model requirements in 2018 as soon as we complete our review of responses to our RFI. At the time of this announcement, FHFA will also set an implementation date, which we have already said will be no earlier than the second half of 2019, in order to provide the Enterprises and other industry stakeholders sufficient time to implement any changes our decision may require them to make. It is our responsibility to consider all the input and to make the tough decisions and we will do so. I am confident we will make the right decision.
Another tough decision we recently had to make was the one we announced just recently to add a question to the revised Uniform Residential Loan Application (URLA) about a borrower's preferred language. It's probably fair to say that our decision will not be universally applauded by members of the MBA, certainly not in the short term. However, every stakeholder from whom we received input acknowledged that serving all creditworthy borrowers, including those who are not proficient in English, is the right objective. Also, we all agree that it is important for every borrower to understand the terms of their loan. MBA's commitment to these objectives lines up squarely with FHFA's statutory mandates. The question, therefore, was how best to improve the process of meeting these objectives.
We decided that an important step forward was adding a "preferred language" question as part of the much larger URLA redesign effort that provides lenders with greater flexibility and process efficiencies. To reach this decision, FHFA undertook a thorough analysis over an extended period of time. We engaged with a wide range of stakeholders, including the MBA and its members. We published a request for input and reviewed the 200-plus responses we received. We evaluated all legal concerns called to our attention. We went through several rounds of consumer and lender testing on the wording of the question and where it could best be placed on the new application form.
As part of our recent announcement, we released the wording of the preferred language question. We have discussed the question with the Consumer Financial Protection Bureau (CFPB) and have been assured that it will receive safe harbor approval under the Equal Credit Opportunity Act as part of CFPB's review of the revised URLA. Lenders will be able to begin voluntary use of the revised URLA in July 2019, with a requirement to use the new form for Enterprise loans starting in February 2020.
As part of our analysis, some stakeholders, including the MBA, expressed concerns about adding this question to the URLA. Let me assure you that every concern expressed was taken very seriously and that the process of exchanging views was essential to advancing FHFA's thinking and the wording of the question itself.
Ultimately, FHFA's decision to add a language access question to the URLA came down to two factors. First, we concluded that the final wording of the question will set the right borrower expectations and appropriately mitigate legal concerns for lenders. The wording of the question emphasizes that the mortgage transaction is likely to be conducted in English, explains that mortgage resources may not be available in languages other than English, and explains that a borrower's indication of a different preferred language does not mean the lender agrees to communicate or transact in the borrower's preferred language.
Second, because this is the first time that the URLA has undergone a significant update in 20 years and it is unlikely to be updated again anytime soon, we concluded that this was the right time to start having borrowers make this important information available to lenders and that making this change now will reduce the prospect of another expensive retooling of Enterprise and industry systems in the future. In the long run, I think we will all find that both the decision and the timing of it will be beneficial.
Moving forward, we want to continue our productive dialogue with MBA members and other stakeholders about the next steps needed to implement the revised URLA. In the time between now and the time when stakeholders begin using the revised form, we of course will continue our work with stakeholders to improve language access resources.
Before I run out of time, let me update you quickly on our responses to the recent hurricanes and wildfires. Following these disasters, FHFA has worked with the Enterprises to implement their disaster relief policies. The Enterprises have a standard 90-day forbearance option that can be extended up to a year for homeowners who live or work in an area declared a major disaster area. The Enterprises also have modification options for disaster situations when homeowners need more permanent help. Moratoriums on foreclosure sales and evictions are in place for declared disaster areas. In addition, there will be no late fees or delinquencies reported to the credit bureaus for affected households during the forbearance period.
FHFA is currently working with the Enterprises to refine these policies to focus more specifically on the circumstances and needs of areas impacted by the recent multiple disasters. This includes a possible term extension modification and adjustments to insurance disbursement requirements. We are also looking into the implications these disasters may have on our representations and warranties protocols.
The Federal Home Loan Banks have also implemented forbearance programs for mortgages they hold in portfolio in response to recent hurricanes and wildfires. The Federal Home Loan Banks of Dallas and New York have each made $1 billion available in low-cost advances for members affected by the hurricanes and made separate donations of $275,000 and $500,000 respectively. The Dallas Bank has also made $6.7 million in grants available to member financial institutions to help with the recovery. In addition, the System has donated a total of $2 million in disaster relief.
We, of course, will continue to monitor the effect of these disasters closely from the perspective of both the Enterprises and the Federal Home Loan Banks.
As I conclude my remarks, I don't want to miss this opportunity to once again join with the MBA in emphasizing the increasing urgency of the need for Congress to act on housing finance reform. Fannie Mae and Freddie Mac reached another milestone last month, completing their ninth year in conservatorship under the control of FHFA. A conservatorship with a nine-year duration is unprecedented in the history of our country. What is perhaps even more startling, however, is the percentage of the overall economy that has been in conservatorship for this protracted period. The Enterprises back over $5 trillion in mortgages, by any measure not an insignificant percentage of the U.S. economy. It is not surprising, therefore, that calls for housing finance reform are growing more and more urgent every day.
FHFA has taken a number of steps to reform the Enterprises and reduce the risk of their business models while they have been in conservatorship. I have spoken and testified about these important reforms in much detail and on multiple occasions. While I think of these reforms as GSE reform, I have also made it clear that I firmly believe that it is the role of Congress, not FHFA, to do housing finance reform. Unlike what I have characterized as GSE reform, housing finance reform will address issues that only Congress can decide. I have tried to be explicit about what some of those issues are:
I hope you will continue to join me in encouraging Congress to decide these important issues as soon as possible. This is becoming more urgent every day.
Thank you again for inviting me to speak to you today and I look forward to continuing to collaborate and work with you going forward.
Media: Stefanie Johnson (202) 649-3030 / Corinne Russell (202) 649-3032Consumers: Consumer Communications or (202) 649-3811
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