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Industry Groups Submit Comments on FHFA’s Proposed Evaluation Guidance for “Duty to Serve” Provisions
As previously discussed in InfoBytes, the Federal Housing Finance Agency (FHFA) published a final rule last December implementing certain “Duty to Serve” provisions of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008. Among other things, the rule requires that Fannie Mae and Freddie Mac (Enterprises) adopt formal plans to improve the availability of mortgage financing in a “safe and sound manner” for residential properties that serve “very low-, low-, and moderate-income families” in three specified underserved markets: manufactured housing, affordable housing preservation, and rural markets. The FHFA also published a Proposed Evaluation Guidance to outline the following: (i) FHFA's expectations regarding the development of such Underserved Markets Plans, and (ii) the process by which FHFA will evaluate annually Fannie’s and Freddie’s achievements under their Plans. The deadline to submit comments was June 7.
Mortgage Bankers Association (MBA) Letter. In its June 7 comment letter, the MBA stated that it commends efforts undertaken by the FHFA to develop a framework of requirements for the Enterprises to follow when preparing their Underserved Market Plans, as well as an evaluation system to rate implementation progress. Particularly, the MBA noted that, based on its data, the U.S. “will see 15.9 million additional households formed over the decade ending in 2024 . . . [which] will increase the need for all types of housing, including already limited affordable housing for very low-, low-, and moderate-income borrowers.” Furthermore, “manufactured home financing, affordable housing preservation, and additional rural housing opportunities can play a key role in providing both first-time home-buying opportunities and affordable rental options for consumers in these underserved markets.” With respect to the Proposed Evaluation Guidance, the MBA stressed the importance of flexibility so adjustments can be made for “unanticipated obstacles or opportunities caused by significant changes in market conditions that arise.”
Center for Responsible Lending (CRL) Letter. Also on June 7, CRL issued a comment letter to the Proposed Guidance in which it offered recommendations concerning “public input and transparency, assessing the contents of the plants to ensure meaningful objectives, and the evaluation and scoring process.” Specifically, CRL noted that while the Enterprises have taken measures such as reinstating lower down payment programs and creating pilot programs to address the underserved markets, it believes a “robust duty to serve process will further access credit initiatives by promoting and incentivizing responsible and sustainable lending to lower wealth households.” However, the CRL also raised several issues over the Proposed Evaluation Guidance, specifically in terms of the proposed scoring system. Under current FHFA guidance, Enterprises’ plans are scored on three factors: progress, impact, and effort/implementation. Conversely, under the proposed scoring system, failure only occurs due to a lack of progress because the impact and effort criteria are assessed only after the Enterprise receives a pass/fail determination. In reaction, CRL raised the following concerns: (i) “What guards against Enterprises putting only low impact objectives in the plan?” (ii) “What incentives do Enterprises have to score highly (above minimally passing)?” and (iii) “What guards against only proposing easily achievable objectives?” In addition to scoring methodology changes, CRL recommended that the FHFA implement a more rigorous loan product and loan purchase evaluation process and increase transparency.
FHFA Publishes Final Rule on State-Chartered Credit Union Membership
On June 5, the Federal Housing Finance Agency (FHFA) issued a final rule amending its regulations to allow certain state-chartered credit unions without Federal share insurance to obtain Federal Home Loan Bank memberships. The final rule is substantially the same as the proposed rule issued by the FHFA in September 2016 with the exception of an added revision intended to help streamline credit union Bank membership applications. The amendment was adopted in order to implement a provision of the Fixing America's Surface Transportation Act and goes into effect July 5, 2017.
FHFA Director Testifies Before Senate Banking Committee, Provides Overview of Housing Finance System and Prospects for Reform
On May 11, the Senate Banking Committee held a hearing at which FHFA Director Mel Watt fielded questions from lawmakers about the conservatorships of Fannie Mae and Freddie Mac (the Enterprises) and prospects for housing finance reform. In his opening statement, Committee Chairman Mike Crapo (R-ID) noted that Fannie and Freddie have been in conservatorship for close to nine years, and stated that “a housing finance system dependent on two government sponsored enterprises in perpetual conservatorship is not a sustainable solution.” According to Sen. Crapo, because approximately 70 percent of mortgages are backed by the federal government, “if the housing market experiences a downturn, taxpayers could again be on the hook for billions of dollars.” Ultimately, the Chairman set forth his position that housing finance reform should be considered the “most significant piece of unfinished business following the financial crisis.”
Meanwhile, FHFA Director Watt testified that, under his leadership, FHFA has “responsibly balanced” and met its “multiple statutory mandates to manage the Enterprises’ day-to-day operations.” He also identified some of the key changes and reforms that have taken place during the conservatorships, including: (i) requiring the Enterprises to emphasize sound underwriting practices in their purchase guidelines; (ii) reducing the Enterprises’ retained portfolios by over sixty percent since 2009; and (iii) developing effective loss mitigation programs, which include aligning the Enterprises’ loss mitigation standards and developing updated loan modification and streamlined refinance products to follow the Home Affordable Modification Program and the Home Affordable Refinance Program.
Director Watt also acknowledged that “FHFA knows probably better than anyone that these conservatorships are not sustainable” and urged Congress to act on several issues related to housing finance reform, including:
- developing a transition process to a new housing finance system to avoid disruption to the housing finance market;
- determining whether the federal government should provide taxpayer backing for the conservatorship, and if so, in what form;
- addressing the role the Enterprises might play in the reformed housing finance system and what statutory changes to their organizational structures, purposes, ownership and operations will be needed to ensure that they play their assigned roles effectively; and
- identifying what regulatory and supervisory structure and authorities will be needed in a reformed system, and who will have responsibility to exercise those authorities.
Furthermore, Director Watt noted that under the provisions of the Enterprises’ Preferred Stock Purchase Agreements, on January 1, 2018 the $1.2 billion buffer protecting the Enterprises against having to make additional draws of taxpayer support in the event of an operating loss in any quarter would be reduced to zero, at which time “neither Enterprise will have the ability to weather any loss it experiences in any quarter without drawing further on taxpayer support.” Director Watt warned that such a situation could erode investor confidence and “stifle liquidity in ways that could increase the cost of mortgage credit to borrowers.” Accordingly, the Director argued that the Enterprises “need some kind of [capital] buffer to shield against short-term operating losses” that could “result in an additional draw of taxpayer support and reduce the fixed dollar commitment Treasury has made to support the Enterprises.”
Reaction of Industry Organizations. In a statement issued shortly after the hearing, Camden R. Fine, President and CEO of Independent Community Bankers of America (ICBA), expressed support for Director Watt after his testimony, agreeing about the need for Fannie and Freddie “to retain their earnings and to start rebuilding their capital buffers.” Meanwhile, Competitive Enterprise Institute (CEI) financial policy expert John Berlau was critical of what he called “an unfair, ongoing government policy of confiscating all Fannie/Freddie shareholder profits.” According to Mr. Berlau, the Enterprises’ “perilous financial state is the direct result of the Obama administration’s 2012‘Third Amendment’ policy, which confiscates all of Fannie and Freddie’s profits for the US Treasury.” He argued that curtailing this policy would allow the Enterprises to “retain some earnings and build capital to spare taxpayers another bailout.”
FHFA Director Appeared Before the Senate Banking Committee on May 11; Discussed Fannie/Freddie, Proposed "Underserved Markets Plans"
On May 11, the Senate Committee on Banking, Housing, and Urban Affairs met in open session at 10:00 a.m. to discuss “The Status of the Housing Finance System After Nine Years of Conservatorship.” Federal Housing Finance Agency (FHFA) Director Mel Watt was the only witness scheduled to testify.
The hearing comes after Fannie Mae (Fannie) and Freddie Mac (Freddie) published their first quarter financial reports. On May 2, Freddie announced $2.2 billion in net income in the first quarter—all of which Freddie expects to distribute to the Treasury, bringing the total to $108.2 billion in dividends. Notably, the $2.2 billion figure was down from its fourth quarter net income of $4.8 billion. Similarly, on May 5, Fannie reported net income of $2.8 billion in the first three months of 2017, money that will be sent to Treasury, which brings its total payments to $162.7 billion. The net income was a significant decline from the $5 billion it reported for the fourth quarter of 2016.
Fannie and Freddie also recently released their respective “Underserved Markets Plans” for public comment. As previously covered by InfoBytes, FHFA published a final rule in the December 18 Federal Register implementing certain Duty to Serve provisions of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008. Among other things, these provisions require Fannie and Freddie to each adopt a formal “Underserved Markets Plan” to improve the availability of mortgage financing for residential properties that serve “very low-, low-, and moderate-income families” in three specified underserved markets: manufactured housing, affordable housing preservation, and rural markets. The Plans can be accessed through the following links:
As explained on the FHFA’s DTS Underserved Markets Plan page, the activities and objectives in each of these Plans may be subject to change based on factors including public input, FHFA comments, compliance with the Enterprises' Charter Acts, safety and soundness considerations, and market or economic conditions. To this end, “views of interested stakeholders are sought on whether the proposed Plans would effectively serve the underserved markets if carried out as proposed, or if there are modifications that each Enterprise should consider making to its proposed Plan to better serve these underserved markets.” The period during which the Enterprises are receiving public input on the proposed Plans will end on July 10.
Pursuant to the same new rule, FHFA has also published a Proposed Evaluation Guidance to provide: (i) FHFA's expectations regarding the development of the Underserved Markets Plans, and (ii) the process by which FHFA will evaluate Fannie’s and Freddie’s achievements under their Plans each year. The deadline for public input on FHFA’s Proposed Evaluation Guidance is June 7.
Financial CHOICE Act of 2017 Approved by House Financial Services Committee
On May 4, GOP efforts to overhaul existing financial regulations took a step forward as the House Financial Services Committee approved H.R. 10, a revised version of the “Financial CHOICE Act of 2017” in a party-line vote, 34-26. The vote concluded a two week period that included both a three-day markup, of the GOP-backed legislation—during which several Democrat committee members sought, unsuccessfully, to remove various provisions of the bill—and, a two-day hearing that included testimony from 18 different witnesses.
Originally introduced by Committee Chairman Jeb Hensarling (R-TX) in September 2016, the main focus of the CHOICE Act was to give financial institutions the option of avoiding many of the rules set up by the 2010 Dodd-Frank law if they maintain a high level of capital and are “well-managed” as defined in the bill. The legislation, if enacted, would also end the Dodd-Frank Act’s taxpayer-funded bailouts of large financial institutions and would impose greater penalties on those who commit fraud and insider trading, while also demanding greater accountability from banking regulators. A summary of changes incorporated in the latest iteration of the proposed legislation—recently referred to as “CHOICE Act 2.0”—was released by the Committee last week and included, among other things:
- the elimination of the CFPB supervisory and examination authority;
- a restructuring of the CFPB, FHFA, OCC, and FDIC into bipartisan commissions appointed by the President;
- an opt-out of many regulatory requirements for banks and other financial institutions if they maintain a 10% leverage ratio (among other conditions);
- subjecting the federal banking regulators to greater congressional oversight and tighter budgetary control;
- reforms in bank stress tests;
- materially reducing the authority of the Financial Stability Oversight Council (FSOC) and the establishment of a new process of identifying financial institutions as "systemically important";
- a repeal of the Orderly Liquidation Authority and the creation of a new bankruptcy process for banks;
- a repeal of the Volcker Rule; and
- facilitated capital raising by small companies, including through crowd-funding.
Looking ahead, the House could vote to pass the bill later this month. While a party-line vote would pass the House, the bill will likely need to pick up a minimum of 60 votes—including support from several Democrats—in order for it to pass in the Senate.
Following Hearing, House Financial Services Committee Chairman Formally Introduces Financial CHOICE Act of 2017
On April 26, the House Financial Services Committee held a hearing to discuss The Financial CHOICE Act – a GOP proposal to “reform the financial regulatory system” that was initially introduced and considered, though differing in a number of respects from the current version, but not adopted in the last Congress. The hearing debated the merits of a discussion draft, which was released on April 19 by Committee Chairman Jeb Hensarling (R-TX). Shortly after Wednesday’s hearing, Chairman Hensarling formally introduced H.R. 10, The Financial CHOICE Act of 2017. An Executive Summary of the proposed legislation has also been released.
The April 26 hearing – a video of which can be accessed here – included testimony from the following witnesses:
- Mr. Peter J. Wallison, a Senior Fellow and Arthur F. Burn Fellow, Financial Policy Studies with the American Enterprise Institute
- Dr. Norbert J. Michel, a Senior Research Fellow, Financial Regulations and Monetary Policy, with the Heritage Foundation
- The Honorable Michael S. Barr, a Professor of Law at University of Michigan Law School
- Mr. Alex J. Pollock, a Distinguished Senior Fellow with the R Street Institute
- Dr. Lisa D. Cook, an Associate Professor of Economics and International Relations at Michigan State University
- Ms. Hester Peirce, a Director in the Financial Markets Working Group and Senior Research Fellow at the Mercatus Center at George Mason University
- Mr. John Allison, Former President and Chief Executive Officer with the Cato Institute
On April 28, Democrats held a separate hearing pursuant to Clause (d)(5) of Rule 3 of the Committee rules, which entitles members of the minority party to call its own hearing on any matter that is the subject of a majority hearing. The second hearing day – a video of which can be accessed here – included testimony from the following witnesses:
- The Honorable Elizabeth Warren, United States Senator
- Rohit Chopra, Senior Fellow, Consumer Federation of America
- Corey Klemmer, Corporate Research Analyst, Office of Investment, AFL-CIO
- Rev. Willie Gable, Pastor, National Baptist Convention USA, Inc.
- John C. Coffee Jr., Adolf A. Berle Professor of Law, Columbia University
- Rob Randhava, Senior Counsel, Leadership Conference on Civil and Human Rights
- Melanie Lubin, Maryland Securities Commissioner, North American Securities Administrators Association
- Emily Liner, Senior Policy Advisor, Economic Program, Third Way
- Amanda Jackson, Organizing and Outreach Manager, Americans for Financial Reform
- Ken Bertsch, Executive Director, Council of Institutional Investors
- Sarah Edelman, Director, Housing Policy, Center for American Progress (CAP)
Ranking Minority Member Maxine Waters (D-CA) also used the hearing to express her strong disapproval of what she has dubbed the “Wrong Choice Act.” Among other things, the ranking member alleged that the proposed legislation would “destroy[] Wall Street reform, gut[] the Consumer Financial Protection Bureau, and returns us to the financial system that allowed risky and predatory Wall Street practices and products to crash our economy.”
FHFA Releases Credit Risk Transfer Progress Report; Fannie Mae, Freddie Mac Transfer $49 Billion in Risk to Investors
On March 27, the Federal Housing Finance Agency (FHFA) released its Credit Risk Transfer Progress Report, presenting a comprehensive overview of the status and volume of credit risk transfer transactions to the private sector for Fannie Mae and Freddie Mac (the Enterprises) through year-end 2016 in both the single-family and multifamily market. As outlined in the progress report, since the beginning of the Enterprises’ Single-Family Credit Risk Transfer Programs in 2013 through December 2016, the Enterprises have transferred $49 billion in credit risk to private investors, amounting to about 3.4 percent of $1.4 trillion in unpaid principal balance. In 2016, the Enterprises transferred about $18 billion worth of credit risk. Transfers include “credit risk transfers via debt issuances, insurance/reinsurance transactions, senior‐subordinate securitizations, and a variety of lender collateralized recourse transactions.” The Multifamily Credit Risk Transfer Program also plays a role in the Freddie Mac business model where “virtually all credit risk is transferred to investors through subordinated bonds structured to absorb credit risk.” Freddie Mac issued bonds on $57 billion of multi-family production in 2016, and Fannie Mae transferred approximately $9.4 billion of loans to the reinsurance industry. The report also examines the role of primary mortgage insurance in credit risk transfer transactions and the Enterprises’ debt issuances.
FHFA Releases January 2017 “Refinance Report”
On March 16, the Federal Housing Finance Agency (FHFA) published the Refinance Report for January 2017. As highlighted in the report, mortgage interest rates continued to increase in December 2016, resulting in a decrease in total refinance volume, although the agency noted that interest rates declined in January 2017. Also included is an overview of the Home Affordable Refinance Program (HARP)—a program established in 2009 to assist homeowners unable to refinance due to home value declines by providing opportunities to refinance through “the transfer of existing mortgage insurance to their newly refinanced loan, or by allowing those without mortgage insurance on their previous loan to refinance without obtaining new coverage.” As reported by the FHFA, “[b]orrowers completed 4,553 refinances through [HARP], bringing total refinances from the inception of the program to 3,452,224 . . ., and borrowers who refinanced through HARP had a lower delinquency rate compared to borrowers eligible for HARP who did not refinance through the program.” HARP, originally scheduled to expire on December 31, 2015, has had its expiration date extended three times and is now set to expire September 30, 2017.
FHFA Includes New Classifications for Reporting Adverse Examination Findings; Amends FOIA Regulations
On March 14, the Federal Housing Finance Agency (“FHFA”) issued an Advisory Bulletin establishing classifications of adverse examination findings for Fannie Mae, Freddie Mac, Federal Home Loan Banks (“FHLBs”), and the FHLB’s Office of Finance (AB 2017-01). Effective for the 2017 examination cycle, the bulletin establishes three designated “classifications,” which can be used by examination staff to communicate adverse examination findings more effectively. The three classifications are meant both to identify priorities for remediation and also to guide FHFA in the development of supervisory strategies. These supervisory strategies include: (i) Matters Requiring Attention—both high-priority critical supervisory matters that pose substantial risk to safety and soundness and deficiencies that, if not corrected, have the potential to escalate and negatively affect a regulated entity or the Office of Finance; (ii) Recommendations—advisory suggestions regarding changes to a policy, procedure, practice, or control; and (iii) Violations—non-compliance with laws, regulations, or orders that requires action by a regulated entity or the Office of Finance to correct, if possible.
On March 15, FHFA issued an interim final rule, amending its FOIA regulations (12 CFR Part 1202) in an effort to bring its internal policies into accord with guidelines established through the FOIA Improvement Act of 2016 (Pub. L. No. 114-185) and the “OPEN FOIA Act of 2009” (Pub. L. No. 111-83, 123 Stat. 2142, 2184 (2009)). The new FOIA rules – which are effective as of March 15—require agencies to, among other things, provide a minimum of 90 days (rather than 30 days) for requesters to file an administrative appeal; and provide notification to requesters about the availability of dispute resolution services.
Fannie, Freddie and FHLBs Ordered to Report Results of Annual Stress Tests
On March 3, FHFA Director Melvin Watt issued orders directing FHFA regulated government-sponsored enterprises (GSEs)—Fannie Mae (Order No. 2017-OR-FNMA-01), Freddie Mac (Order No. 2017-OR-FHLMC-01), and the 11 Federal Home Loan Banks collectively (Order No. 2017-OR-B-01)—to report the results of their stress tests so that the financial regulators may determine whether the GSEs “have the capital necessary to absorb losses as a result of adverse economic conditions.” The orders were issued pursuant to the requirement under the Dodd-Frank Act that covered financial institutions with total consolidated assets of more than $10 billion conduct an annual stress test to determine whether they have sufficient capital to support operations in adverse economic conditions. Accompanying each order was a copy of the “2017 Report Cycle Dodd-Frank Stress Tests Summary Instructions and Guidance.”
On April 14, the FHFA order was officially published in the Federal Register.