FHFA Takes Initiative on Idled Housing Finance Reform

Freddie Mac Fannie Mae

On February 21, the Federal Housing Finance Agency (FHFA) submitted a strategic plan outlining the next phase of its conservatorship of Fannie Mae and Freddie Mac (the Enterprises). FHFA’s plan is in part a response to requests from lawmakers, including requests made during a December 2011 hearing. FHFA states that it will seek to build a new infrastructure for the secondary mortgage market, contract the Enterprises’ current market dominance, and maintain the Enterprises’ roles in foreclosure prevention activities and refinance initiatives. FHFA also outlines the legal authority under which it plans to act.

Until Congress can enact broader housing finance reform, FHFA envisions moving the Enterprises into a single open-architecture securitization platform that could become a type of public utility that would outlast the Enterprises. This move would also be accompanied by uniform standards for underwriting, disclosures, and servicing, and a robust and standard pooling and servicing agreement. FHFA will also contract Enterprise operations by (i) working to shift mortgage credit risk to private investors through some combination of increasing the g-fee, establishing loss sharing arrangements, and/or expanding reliance on mortgage insurance; (ii) directing the Enterprises to conduct a market analysis of the viability of their multifamily operations without government guarantees; and (iii) considering whether to retain each Enterprise's capital markets expertise to manage portfolios, or to hire a third-party investment firm to manage the portfolios. Finally, the FHFA asserts that it will maintain foreclosure prevention efforts and credit availability by (i) continuing existing programs such as the Servicing Alignment Initiative, HARP, and REO disposition initiatives; (ii) aligning and making policies for representations and warranties more transparent, in conjunction with the ongoing Uniform Mortgage Data Program; and (iii) pursuing lawsuits alleging securities law violations in private-label mortgage-backed securities purchased by the Enterprises.

The FHFA paper notes that these strategic goals and plans are consistent with each of the housing finance reform options identified in a February 2011 Obama administration report to Congress, as well as "leading legislative proposals." However, the paper also reminds legislators that fully addressing the Enterprises and the federal government's role in the secondary mortgage market will require congressional action, which should not be impaired by the FHFA's immediate pursuit of its strategic goals. For additional details on the strategic plan, please click here.