Sandra L. Thompson, Acting Director
Federal Housing Finance Agency
MBA KEYNOTE REMARKS AS PREPARED FOR DELIVERY
Monday, October 18, 2021
Thank you, for that introduction Kristy. It is always an honor to share a stage with Secretary Fudge, and I am glad to be back at MBA's annual conference, addressing you for the first time as Acting FHFA Director.
The past few months have been a busy and productive period for FHFA. I am here today to update you on our recent work, and to clearly articulate the path forward for our Agency and our regulated entities: Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
FHFA is a unique financial regulator in that each of our regulated entities was chartered by Congress to fulfill specific purposes and duties. Our Agency is charged with ensuring that they fulfill their missions by responsibly promoting equitable access to mortgage credit throughout the Nation, including to underserved communities, through safe and sound business practices.
Our work stands on the twin pillars of good lending: sustainability and affordability. Each of these pillars is necessary for safe, sound, and effective financing, and each strengthens the other. After all, a loan that a borrower cannot afford is unsustainable: it will stop performing. And loan products, like some of those sold in the first decade of the 2000s that reset from low teaser rates up to unsustainable payment schedules, or contained no income documentation, cannot reasonably be called affordable.
Much of our work consists of the rigorous, detailed supervision and oversight that our team carries out every day. As regulator and prudential supervisor, we review the business activities, financial performance, and governance of our regulated entities to ensure that they are managing risk effectively while meeting mission obligations and statutory requirements. And as conservator of Fannie Mae and Freddie Mac, “the Enterprises," we oversee operations and strategic decisions in greater detail, directing them to preserve and conserve their assets while fulfilling their charter purposes and responsibilities.
This may not sound exciting to everyone, but to this lifelong regulator and the rest of our expert team, it is compelling and fulfilling work. At FHFA, we are focused on identifying and deploying the right solutions to address challenges in housing finance. We recognize that one size does not always fit all or benefit all households equally.
So, we are looking to continue to strengthen our ability to protect the housing finance system throughout the economic cycle while ensuring equitable access to credit reaches all borrowers, including historically underserved communities. We are accomplishing this through a series of discrete steps that we are optimistic will add up to significant progress in advancing both sustainability and affordability.
The Enterprise Regulatory Capital Framework that FHFA finalized last year was designed to ensure the safety and soundness of Fannie Mae and Freddie Mac throughout the economic cycle by establishing robust regulatory capital requirements to be met with high quality capital.
Our analysis never stops, however. And this year we identified two areas that warranted revision.
We have now seen that the risk-blind leverage buffer was set so high that, together with the leverage requirement, it eclipsed the risk-sensitive aspect of the rule. As a result, it could provide the Enterprises with incentives to pursue and retain more risk.
Last month, we proposed modifications to the buffer that will allow the rule to work as intended, with the leverage requirements and buffer serving as a credible backstop to the risk-based capital requirements that will keep the Enterprises strong throughout even another event like the Great Recession.
We recognize that, together, the Enterprises hold trillions of dollars of mortgage credit risk, so their ability to transfer some of this risk away from taxpayers and to private markets makes for a healthier housing finance system. In our continued review of the regulatory capital treatment of Credit Risk Transfers, we concluded that the rule was not providing sufficient capital relief for these transactions.
Our September notice of proposed rulemaking would correct both those problems.
As a veteran of many financial crises, I can assure you that I have a strong appreciation for the importance of loss-absorbing capital at financial institutions. The Enterprises are now rebuilding their own capital to ensure that they have the resources to fulfill their mission to keep housing finance markets liquid, in both good times and bad.
We will continue to review capital adequacy and capital requirements at the Enterprises, and in doing so, we will be sure to promote transparency and good planning in the process.
The same week we released those proposed capital rule changes, FHFA addressed another set of requirements that needed adjustment. In dialogue with stakeholders like you here at MBA, FHFA had identified market disruptions from some of the January 2021 changes made to the Preferred Stock Purchase Agreements, or PSPAs, that govern the Enterprise conservatorships. One was a restriction on Enterprise cash acquisitions that was particularly disruptive to smaller originators who rely on the cash window because they simply don't have a big bank's infrastructure to do MBS swaps.
We were also concerned about the disruptive effects, including pipeline effects from the implementation timing, of the hard restrictions on purchases of second home and investor properties, single-family loans with higher risk characteristics, and multifamily loans. Overseeing the Enterprises' exposure to particular product lines is a routine part of FHFA's supervisory and oversight work – it is a basic tenet of financial institution regulation.
Therefore, working with the Treasury Department, we suspended these PSPA provisions while we conduct a review of whether they are redundant with existing FHFA and Enterprise policies to manage credit risk. And the Enterprises, of course, will continue to manage their involvement with these market segments.
This approach will allow us to ensure that our day-to-day supervisory and conservatorship work protects the safety and soundness of the Enterprises while ensuring the Enterprises continue to fulfill their necessary role as a source of liquidity for the housing finance market.
Of course, the Enterprises and their business partners are mutually reliant on each other in the mortgage ecosystem. The Enterprises connect lenders to capital markets, but many of those same lenders also service the loans on behalf of the Enterprises. And just as we need to ensure that Fannie Mae and Freddie Mac are safe and sound, it is important to strengthen the counterparties they rely on. And we recognize that the servicing industry could benefit from increased coordination between Enterprise, Ginnie Mae, and CSBS standards.
I know that many here are anxious about the timing of updated Enterprise nonbank seller-servicer standards. I can tell you that Servicer Eligibility 2.0 will not come before next year. Right now, we need Enterprise servicers to focus their full attention on helping distressed borrowers transition out of COVID forbearance into long-term, sustainable situations that keep them in their homes.
Once that work is mostly accomplished, we will be in a good position to finish updating the proposal we released in January 2020 and to incorporate the lessons learned from the experience of the past two years.
Through our monitoring of the effects of the pandemic on different borrowers, we identified a concerning trend: while many borrowers have taken advantage of the opportunity provided by the past year's low interest rates to refinance their mortgage, segments of the population are at risk of being left behind. We know through our long experience, including the Great Recession, that for those struggling with a mortgage, a meaningful payment reduction is the single greatest predictor of successful performance.
However, during this historic refi boom, we found that there was actually a drop in the share of refinance loans made to borrowers below 100 percent of AMI. These borrowers risk being left on the sidelines during a generational opportunity to lock in more sustainable monthly payments. And these are often the very people who could most benefit from adding breathing room to their budget.
To address this, I am pleased to announce today that Fannie Mae and Freddie Mac will be expanding their new low-AMI refinance programs, RefiNow and RefiPossible, with several enhancements to grow the eligible population and to make these programs easier for lenders to offer.
We first announced these programs in the spring, as a way of helping low- and moderate-income borrowers access the same refi opportunities that higher income borrowers were using. Take up of these programs has been slower among some of the larger depository lenders, and these new changes incorporate feedback we have received about how to make the programs more effective and how to reduce frictions in the process.
The new income threshold will be raised from 80 percent of AMI to 100, significantly increasing the population of potentially eligible borrowers. And we have removed operational frictions in calculating the benefit to borrowers and financing closing costs.
By taking advantage of lower interest rates, borrowers can reduce the share of their income they have to spend on housing costs. And given that these are already borrowers with an Enterprise-backed mortgage, they can access these financial benefits with minimal additional risks or costs to the Enterprises or taxpayers.
This should be an urgent priority, as we are seeing significant numbers of lower income and minority Enterprise borrowers stuck in rates 30 to 60 percent higher than the current average. There are even a surprising number of Enterprise borrowers who have been diligently paying the mortgages they received in the 2000s but are still having to pay rates of more than 6 percent. To assist these borrowers in lowering their monthly payments, the Enterprises will remove the 10-year seasoning cap from the original program.
Clearly, we still have work to do to ensure mortgage credit reaches everyone on an equitable basis. Our economic recovery has been uneven, and not everyone is necessarily in a place to qualify for a refinance. But that alone doesn't explain the gaps we are seeing in refinances to creditworthy Enterprise borrowers.
And we know from experience with HARP and with programs for lower income and minority borrowers that those with smaller balances tend to get left behind when it comes to refinancing opportunities.
I strongly encourage all originators to see if they can help advance equity in our housing system by connecting Enterprise borrowers to affordable, sustainable refinance opportunities.
Success will require ensuring the inclusion of communities of color that have faced setbacks in building wealth through homeownership for generations. FHFA's regulated entities have a responsibility to promote access to mortgage credit across the Nation, and we must ensure it reaches everyone on fair and equitable terms. We are developing our capabilities to address this challenge through avenues such as the new equitable housing finance plans for the Enterprises, and FHFA's own growing fair lending infrastructure.
Since Secretary Fudge was just on stage, I want to say how much I have appreciated our agencies' collaboration on fair lending. I was proud to cross the street between our offices to sign a historic Fair Lending Memorandum of Understanding between FHFA and HUD, which will help both agencies better fulfill our fair lending oversight responsibilities. FHFA is also an active member of the interagency Appraisal Bias task force led by Secretary Fudge and Ambassador Rice.
While I am on the topic of the valuation process, appraisal modernization is an issue we have been examining for a long time. We know that frictions in the appraisal process can slow or even stop the extension of mortgage credit. This can be particularly challenging in rural communities, where an appraiser has to allocate even more of their day driving from property to property.
We were already discussing the future of the appraisal industry when, last year, the country was hit by a sudden health emergency that at times kept appraisers out of homes altogether. FHFA quickly announced a number of short-term appraisal flexibilities to keep the mortgage market functioning once COVID-19 hit.
While all COVID origination flexibilities expired earlier this year, FHFA has been reviewing the data gained from the use of these flexibilities, as well as the feedback we received from practitioners across the industry on our appraisal RFI.
I can tell you now that both Enterprises will incorporate desktop appraisals into their guides for many new purchase loans starting in early 2022.
The housing market is always changing, and we need to ensure that our structures and systems grow and evolve with it by fully using all the appropriate tools and available information. With desktop appraisals, an appraiser brings their valuation expertise to information that has already been made available to them, such as through listings. This can help each appraiser complete more loans in a day, and it can also help rural communities more readily obtain a necessary appraisal when the borrower is purchasing a property.
With desktop appraisals included in the selling guides, what was one of the temporary flexibilities with an uncertain future has been adjusted to mitigate risk for use over the long-term and will now become an established option for originating Enterprise loans. An option that lenders can count on.
This certainty should allow lenders, borrowers, and appraisers alike to take advantage of the efficiency gains that desktop appraisals can provide and to continue the work of making our mortgage finance system more effective.
You can see that FHFA's approach to our work is careful and thorough.
We are always monitoring our regulated entities as well as conditions in the housing market. When we identify problems or potential issues that could affect the safety and soundness or mission of our regulated entities, we take the time to get a holistic view of the issue, taking into account all relevant factors, including but not limited to a policy's potential effects on risk management, affordability, and access to credit.
And we ensure that we have the right policy for the job, whether that involves one of our tried-and-true supervisory tools, or a new solution tailored to the challenge at hand.
We roll out new policies deliberately, in ongoing dialogue with informed stakeholders. We will not make sudden changes that disrupt in-process pipelines, as we have a responsibility to promote stability in housing finance markets. But we do continuously respond to the discrete needs of our regulated entities' mission responsibilities and safety and soundness.
We recognize that all families should have equitable access to long-term, affordable housing opportunities, and that we have a duty to identify and overcome barriers to sustainable homeownership and affordable rental housing. And all our policies are built on those twin pillars of sustainability and affordability.
This is how we will approach our work going forward.
Thank you for the opportunity to speak with you today, and Kristy, I look forward to our conversation here onstage.