FHFA Outlines Strategic Plan, Goals for Next Four Years

By: Jann Swanson •

The Federal Housing Finance Agency released a draft of its Strategic Plan:  Fiscal Years 2013-2017 this morning.  The document, which lays out goals for those years and methods for achieving them, is available for public comment until June 13.

In the time available for reviewing the document in juxtaposition with the final Strategic Plan for  2009 - 2013 is was not possible, especially given the different formats, to pick out differences and changes that might reflect a change in policy rather than the passage of time however there were three proposed initiatives that did jump out.  These were among the methods suggested for accomplishing Goal 4, Prepare for the Future of Housing Finance in the United States.   

  • Build a single securitization platform to replace current separate proprietary systems. This platform will specifically bundle mortgages into any of an array of securities structures and process and track the payments from borrowers through to investors.
  • Develop a new system for document custody and electronic registration of mortgage notes, titles, and liens. The system will take into account local property laws and will seek to enhance the liquidity of mortgages so that borrowers can benefit from a robust secondary market for buying and selling mortgages.
  • Expand reliance on mortgage insurance. Although some mortgage insurers are facing financial challenges, deeper mortgage insurance coverage on individual loans or through pool-level insurance policies could expand the amount of risk mortgage insurers carry.

For the remainder, we have summarized the main goals and expanded on some of the other proposed strategies that seem to go beyond government-required management boilerplate.

Goal 1:  Safe and Sound Housing GSE's

  • Identify risks and require timely remediation of weaknesses
  • Improve the condition of the regulated entities

Goal 2:  Stability, Liquidity, and Access to Housing Finance

  • Promote stability and mitigate systemic risk that could lead to market instability.

    FHFA said it will explore more private-sector risk-sharing opportunities and will continue to explore options to support a stable transition to a system with greater private sector participation.  While Congress is discussing the form in which this system will emerge, FHFA will concentrate on retaining value in the business operations of the GSEs.

    To this end, FHFA will monitor their use of derivatives by establishing capital and margin requirements for swap transactions that have not been cleared as part of the joint rulemaking process and will monitor the GSEs readiness for and move to central clearing.  This transition will be monitored to determine the cost and effectiveness of interest rate risk management, the level of operation risk, and borrowing costs at the GSEs.

    FHFA will also work with the GSEs to improve improving home retention initiatives and develop alternatives to dispose of real estate owned (REO) by the GSEs.

  • Ensure liquidity in mortgage markets

    FHFA will monitor Federal Home Loan Banks (FHLBanks) to ensure their liquidity to respond promptly to sudden increases in demand for advances and to ensure  there are no unnecessary impediments to their ability to efficiently and competitively provide liquidity for housing markets through normal or stressed markets and during cycles of expansion and contraction.

    The agency plans to assess and monitor the potential impact on the Federal Home Loan Banks (FHLBanks) resulting from the new capital rules and liquidity required by the Basel III Accord .

  • Expand access to housing finance for diverse financial institutions and qualified borrowers.
     
    FHFA will require that the Enterprises avoid and unwarranted policies or practices that favor large institutions to the disadvantage of small ones and will ensure minority and women inclusion in the activities of the GSEs.  It will also examine FHLBanks to ensure they are administering their business fairly and impartially and without discrimination in favor or against any member.

FHFA said that the next two goals are established as immediate goals which it plans to achieve within the next two to three years

Goal 3:  Preserve and Conserve Enterprise Assets

  • Minimize taxpayer losses during the GSE conservatorships. There are a number of sub goals set out under this immediate goal and some are expansions of the longer term expectations set out above.
  • To oversee the staff and compensation structure of the GSEs to ensure the ongoing hiring and retention of qualified people at the lowest target compensation consistent with stability and conserving talent.
  • Implement the Home Affordable Refinance Program 2 (HARP 2.0) and implement and refine loan modification and refinancing initiatives as needed.
  • Enhance the use of short sales, deeds in lieu, and deed for lease options
  • Establish appropriate underwriting standards for mortgages purchased by the GSEs and risk-based pricing of guarantee fees.  To attract private capital to the mortgage market and reduce GSE risk exposure, FHFA will direct the Enterprises to price guarantee fees to levels that align pricing with actual risk and in an orderly manner that does not disrupt markets.
  • FHFA intends to evaluate different options for the GSEs to share risk among various parties to a transaction.  Risk-sharing can help inform the GSEs about their guarantee fee pricing and more accurate price discovery would then be established through market competition.
  • Assess and resolve remaining reps and warranties repurchase requests pertaining to the pre-conservatorship book of business.  Resolving these claims ensures that the GSEs are appropriately compensated  for but FHFA will work with the GSEs to align and make policies for reps and warranties more transparent.
  • Conclude outstanding claims involving private-label mortgage-backed securities (MBS).  There are suits pending against 18 financial institutions which FHFA believes misled the GSEs about the risks of underlying loans.
  • The embargoes against new lines of business for the GSEs will continue and FHFA plans to identify operations or business lines that should be shrunk or eliminated, consistent with other strategic goals.

Goal 4:  Prepare for the future of housing finance in the U.S. 

  • Contract Enterprise operations
  • Establish standards that promote a safer and more efficient housing finance system
  • Build new infrastructure for the secondary mortgage market.

    The GSEs have bought or guaranteed approximately 75 percent of mortgages originated in the country since entering into conservatorship in September 2008.  The challenge for FHFA is how to reduce that position in the marketplace without comparable private-sector players.  In addition to the three proposals covered at the beginning of this summary and some strategies that duplicate those for Goal 3, the following are the key strategies for accomplishing Goal 4.
  • Enforce Treasury agreements to shirk retained mortgage portfolios by at least 10 percent per year.
  • Complete the implementation of the Uniform Mortgage Data Program
  • Identify and implement appropriate changes to servicing compensation.   The Joint Servicing Compensation Initiative is seeking boarder options for compensation to increase competition and to identify options that can be repeated in any future housing finance system.
  • Develop and analyze alternative GSE transition Plans
  • Contribute to defining the future roles for the FHLBanks.  This will include evaluating the role these banks can support the transition to a new system of housing finance in the U.S.
  • Create robust and standardized pooling and servicing agreements.