KEY mortgage finance SYSTEM REFORM CONCEPTS AND ISSUES
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The following concepts and topics have been compiled from various sources in an attempt to lay out and provide background for interested readers as the debate and actions take place on reforming the U.S. residential mortgage finance system.
Residential MORTGAGE FINANCE SYSTEM
The schematic here created by the FHFA depicts the life cyle of the housing and mortgage finance system. This may provide background to understand the role of today's participants and expectations on future roles as the mortgage finance system changes with legislative or regulatory actions.
One of the key areas of focus for GSE reform is the Secondary Market functions and participants, including Fannie & Freddie. A goal for mortgage finance reform is to return the mortgage finance system back to a private capital based system and reduce the role of the federal government which increased upon placement of Fannie & Freddie into conservatorship.
overview of current AND possible FUTURE roles or functions of fannie mae & freddie mac
COMMON SECURITIZATION SOLUTION, LLC &
COMMON SECURITIZATION PLATFORM functions
Sources of Information on Single Security and Common Securitization Platform:
FHFA Single Security and CSP (SS/CSP) Update website
FHFA Timeline for Completion of SS/CSP website
Fannie Mae Single Security and CSP Update website
Freddie Mac Single Security and CSP Update website
Common Securitization Solutions LLC website
Single Security Program Features and Market Impacts presentation
RESOLUTION OF FANNIE & FREDDIE CONSERVATORSHIP
The resolution of Fannie & Freddie conservatorship is a key element of the mortgage finance system reform. Fannie & Freddie simplistically may be viewed as in two businesses: (1) single family mortgage securitization and (2) multifamily mortgage securitization and investment. Underlying each of these two businesses are critical infrastructure, technology and systems, operations and experienced staff. In addition, each GSE has other loan and investments on their balance sheet. The balance sheet risks - primarily interest rate - are managed through derivatives activities. And Fannie & Freddie recently have started making allocations to three affordable housing funds. Fannie & Freddie are also jointly involved in the development of a new common MBS security and a new common securitization platform. How do you restructure Fannie & Freddie and reposition these activities without impacting other participants in the U.S. mortgage finance system? There is renewed consensus that now is the right time to proceed to create the legislative framework for action as Fannie & Freddie's profitability is leveling off and dividends to U.S. Treasury are declining. And with the net worth floor eliminated next year, U.S. Treasury and FHFA amend agreement to establish an ongoing $3.0 billion Capital Reserve floor.
Fannie Mae & Freddie Mac - Treasury Payments and Profitability Trends: Using a pro forma pre-tax adjusted income approach (not perfect and others may have their own approach), let's eliminate the impact of taxes, credit costs (provision or benefit for credit losses and other real estate expenses), litigation settlements, various gains, losses or net impairment of investment securities and gains or losses on derivative activities. The resulting "adjusted income" shows a declining trend toward a new sustainable level reflecting the change in business models (CRT costs, reduction in investment securities, etc.). Annually Fannie & Freddie are earning between $25 and 30 billion. Assuming pre-tax P/E equivalent of 10, could Fannie & Freddie's combined value be $250 to $300 billion? On 2017/12/21, U.S. Treasury and FHFA agree to amend preferred stock agreement to create a Capital Reserve requirement of $3 billion with quarterly earnings above that level to be declared and paid as dividends: Fannie Mae letter, Freddie Mac letter and FHFA announcement. Through Q2 2019 and including and expected Q3 2019 payment, U.S. Treasury has received a net $115 billion and earned an annualized +11% on their senior preferred stock holdings.
Guarantee fees will be an important element as mortgage finance system reform occurs. Today, Fannie & Freddie charge an average annual g-fee of 56 basis points that includes 10 bps for Temporary Payroll Tax Cut Continuation Act of 2011 and has leveled off over the past few years. Fannie & Freddie earn a net guarantee fee of 46 basis points after remitting the 10 bps “payroll tax” charge back to the U.S. Treasury. This is Fannie & Freddie's core revenue source to cover their MBS guarantee risk, including the cost of the credit risk transfer programs (Freddie Mac indicates in S.E.C. filing that CRT costs utilize approximately 31%, on average, of their g-fee revenues for those specific portfolios).
Here is link to FHFA website page on Guarantee Fees.
GUARANTORS AND CREDIT RISK TRANSFER
SMALL LENDER ACCESS
"Small Lender" access has been a key topic over the past few years in discussions of mortgage finance system reform and GSE reform. Only in recent years has the guarantee fees charged to small lenders become equal to that charged large lenders - no more volume discounting. Small Lender access may also be relevant as consideration of regulation continues as there is concern that the costs of compliance is disproportionate to small lenders. In Senate Banking Committee hearings in 2017 and in 2013, there were sessions on "Maintaining Access for Small Lenders", "Protecting Small Lender Access to the Secondary Market" and "Creating a Housing Finance System Built to Last: Ensuring Access for Community Institutions". Small lenders - banks, thrifts, credit unions, mortgage banks, mortgage brokers and others - play an important role in our mortgage finance system and need a level playing field and equal access to the secondary market.
AFFORDABLE HOUSING SUPPORT
DISCUSSION: With home prices continuing to rise, homeownership rate falling, rental vacancy rates declining and rents rising, there remain concerns over the affordability of housing: owner-occupied and rental. This is a topic of much discussion, including at a recent Senate Banking Committee hearing: Center for Responsible Lending testimony.
There several key affordable housing programs in place today. The Federal Home Loan Banks have an affordable housing assessment annually that is used by the eleven FHLBanks to support affordable housing and first-time home buyers (link to program summary).
Starting in 2017, Fannie & Freddie started making allocations to support two housing trust funds, including HUD's Housing Trust Fund (65% allocation) and Treasury's Capital Magnet Fund (35% allocation). Link to FHFA report on Fannie & Freddie programs to support affordable housing and underserved markets.
Together, these important programs invest approximately $0.8 billion annually in support of affordable housing.
As GSE and mortgage finance system reform discussions continue, affordable housing will be a key element of those discussions.