The next phase in conservatorship for Fannie Mae and Freddie Mac has been laid out for legislators.
In a letter to the chairmen and ranking minority members of the Senate Committee on Banking Housing and Urban Affairs and the House Committee on Financial Services, Federal Housing Finance Agency Acting Director Edward J. DeMarco outlined plans reduce the role of the two secondary finance agencies.
FHFA was established through The Housing and Economic Recovery Act of 2008, which was signed into law by President George W. Bush in July 2008.
By the time that the financial crisis reached a fever pitch in September 2008 and capital markets froze up, the government determined that it was time to place Fannie and Freddie under the conservatorship of FHFA, where both companies remain today after costing U.S. taxpayers more than $180 billion.
“With the conservatorships operating for more than three years and no near-term resolution in sight, it is time to update and extend the goals and directions of the conservatorships,” DeMarco said in an announcement. “FHFA is contemplating next steps to build an infrastructure for the secondary mortgage market that is consistent with existing policy proposals and will support any outcome of the leading legislative proposals.”
DeMarco wants a new infrastructure built for the secondary mortgage market. He noted that no private infrastructure exists that could handle $100 billion in monthly securitizations. The regulator explained that interest rates would jump and mortgage availability would fall if the two companies were shuttered.
Key to a private solution is a securitization platform. Also necessary are standard pooling-and-servicing agreements to replace Fannie’s and Freddie’s servicer participation agreements.
Transparent servicing requirements are also needed. The requirements must outline servicers’ responsibilities to borrowers and investors across a spectrum of issues including distressed servicing, refinance solicitations and loan modifications. Servicing transfers must also be addressed.
In addition, servicing compensation needs to promote competition.
DeMarco also wants to gradually reduce their market share, simplify their operations and shrink their businesses. The two enterprises own or guarantee more than $5.7 trillion in mortgages.
The Mortgage Bankers Association came out in support of avoiding ‘knee-jerk’ reactions.
“We greatly appreciate the constructive nature of the proposals outlined by FHFA Acting Director Ed DeMarco to wind down Fannie and Freddie, only after taking steps to create a new infrastructure for the secondary mortgage market,” MBS President and CEO David H. Stevens said in a statement. “Moving towards a single security, aligning servicing requirements and reducing the retained portfolios while avoiding a fire sale are all moves that we have supported. We look forward to working with policymakers, including FHFA, to refine the roles of the GSEs and to bring private capital back to the market.”
A third strategic goal for FHFA is to maintain foreclosure-prevention activities and credit availability for new and refinanced loans.
“This next chapter will also see a gradual reduction in the enterprises’ dominant position in holding mortgage credit risk as private capital is encouraged back into that role,” DeMarco stated. “The final chapter, though, remains the province of lawmakers. Fannie Mae and Freddie Mac were chartered by Congress and by law, only Congress can abolish or modify those charters and set forth a vision for a new secondary market structure.”
