Tag Archives: Strategic Plan

Treasury’s Take on Housing Finance Reform

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Treasury Secretary Mnuchin Being Sworn In

The Department of the Treasury released its Strategic Plan for 2018-2022. One of its 17 Strategic Objectives is to promote housing finance reform:

Support housing finance reform to resolve Government-Sponsored Enterprise (GSE) conservatorships and prevent taxpayer bailouts of public and private mortgage finance entities, while promoting consumer choice within the mortgage market.

Desired Outcomes

Increased share of mortgage credit supported by private capital; Resolution of GSE conservatorships; Appropriate level of sustainable homeownership.

Why Does This Matter?

Fannie Mae and Freddie Mac have been in federal conservatorship for nine years. Taxpayers continue to stand behind their obligations through capital support agreements while there is no clear path for the resolution of their conservatorship. The GSEs, combined with federal housing programs such as those at the Federal Housing Administration and the Department of Veterans Affairs, support more than 70 percent of new mortgage originations. Changes should encourage the entry of greater private capital in the U.S. housing finance system. Resolution of the GSE conservatorships and right-sizing of federal housing programs is necessary to support a more sustainable U.S. housing finance system. (16)

The Plan states that Treasury’s strategies to achieve these objectives are to engage “stakeholders to develop housing finance reform recommendations.” (17) These stakeholders include Congress, the FHFA, Fed, SEC, CFPB, FDIC, HUD (including the FHA), VA, Fannie Mae, Freddie Mac, the Association of State Banking Regulators as well as “The Public.” Treasury further intends to disseminate “principles and recommendations for housing finance reform” and plan “for the resolution of current GSE conservatorships.” (Id.)

This is all to the good of course, but it is at such a high level of generality that it tells us next to nothing. In this regard, Trump’s Treasury is not all that different from Obama and George W. Bush’s. Treasury has not taken a lead on housing finance reform since the financial crisis began. While there is nothing wrong with letting Congress take the lead on this issue, it would move things forward if Treasury created an environment in which housing finance reform was clearly identified as a priority in Washington. Nothing good will come from letting Fannie and Freddie limp along in conservatorship for a decade or more.

The “Humbled” Consumer Financial Protection Bureau

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photo by Lilla Frerichs

The Consumer Financial Protection Bureau is changing directions in a big way under the leadership of Mick Mulvaney as seen in its Strategic Plan for FY 2018-2022. In his opening message to the Plan, Mulvaney writes that the Plan

presents an opportunity to explain to the public how the Bureau intends to fulfill its statutory duties consistent with the strategic vision of its new leadership. In reviewing the draft Strategic Plan released by the Bureau in October 2017, it became clear to me that the Bureau needed a more coherent strategic direction. If there is one way to summarize the strategic changes occurring at the Bureau, it is this: we have committed to fulfill the Bureau’s statutory responsibilities, but go no further. Indeed, this should be an ironclad promise for any federal agency; pushing the envelope in pursuit of other objectives ignores the will of the American people, as established in law by their representatives in Congress and the White House. Pushing the envelope also risks trampling upon the liberties of our citizens, or interfering with the sovereignty or autonomy of the states or Indian tribes. I have resolved that this will not happen at the Bureau.

So how do we refocus the Bureau’s efforts to better protect consumers? How do we succinctly define the Bureau’s unique mission, goals, and objectives? Fortunately, the necessary tools are already set forth in statute. We have drawn the strategic plan’s mission statement directly from Sections 1011 and 1013 of the Dodd-Frank Act: “to regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws” and “to educate and empower consumers to make better informed financial decisions.” We have similarly drawn the strategic plan’s first two strategic goals and its five strategic objectives from Section 1021 of the Dodd-Frank Act. By hewing to the statute, this Strategic Plan provides the Bureau a ready roadmap, a touchstone with a fixed meaning that should serve as a bulwark against the misuse of our unparalleled powers. Just as important, it provides clarity and certainty to market participants. (2)

The subtext of this change in direction is not that “sub” at all. The Trump Administration wants to rein in the Bureau after it aggressively pursued financial services companies for violating a broad range of consumer protection statutes.

The Plan says that the Bureau will now act “with humility and moderation.” What that means is that the it will now be cutting financial services firms a lot of slack. Let’s see how a humbled Bureau works out for consumers.

FHFA’s Strategic Plan for Fannie and Freddie

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The Federal Housing Finance Agency released its Strategic Plan for fiscal years 2018-2022 for public input. As discussed in yesterday’s post, Director Watt is very focused on maintaining the health of Fannie Mae and Freddie Mac. The Strategic Plan reiterates that focus:

As conservator of the Enterprises, FHFA will also promote stability by working to preserve and conserve the Enterprises’ assets and business operations. Additionally, FHFA will encourage the Enterprises and the housing industry to adopt standards and practices that promote market and stakeholder confidence. (8)

The Plan goes into depth to describe the FHFA’s role as conservator:

The Enterprises were placed into conservatorships in September 2008 in the midst of a severe financial crisis. Their ongoing participation in the housing finance market has been an important factor in maintaining market liquidity and stability. Conservatorship permitted the U.S. Government to take greater control over management of the Enterprises and gave investors in the Enterprises’ debt and MBS confidence that the Enterprises would have the capacity to honor their financial obligations. As conservator, FHFA establishes restrictions and expectations for the Enterprises’ boards and for their managements while authorizing them to conduct the Enterprises’ day-to-day operations.

As detailed earlier, FHFA’s authority as both regulator and conservator of the Enterprises is based upon statutory mandates. FHFA, acting as regulator and conservator, must follow the mandates assigned to it by statute and the missions assigned to the Enterprises by their charters. Congress may choose to revise the statutory mandates governing the Enterprises at any time.

*      *     *

The Enterprises are also parties to PSPAs with the Treasury Department. Under the PSPAs, the Enterprises are provided U.S. taxpayer backing with explicit dollar limits. The PSPA commitment still available to Fannie Mae is $117.6 billion and the commitment still available to Freddie Mac is $140.5 billion. Additional draws would reduce these commitments, and dividend payments do not replenish or increase the commitments under the terms of the PSPAs. Starting in 2013, the PSPAs provided each Enterprise with a capital buffer of $3 billion to protect each Enterprise against making additional draws of taxpayer support in the event of an operating loss in any quarter, and the PSPAs provide mandated declines of $600 million each year to these capital buffers. On January 1, 2017, each Enterprise’s capital buffer declined to $600 million and the capital buffer is scheduled to decline to zero on January 1, 2018.

FHFA continues to encourage Congress to complete the important work of housing finance reform. FHFA has reiterated the urgency of reform and that it is up to Congress to determine what future, if any, the Enterprises will have in the future housing finance system. (16-17)

Reading between the lines, I see the FHFA under Watt doing whatever it has to in order to maintain stability and liquidity in the mortgage markets. If Congress does not act, if the Treasury does not act, I think that Director Watt will go it alone and do what it takes to maintain Fannie and Freddie’s reputation with mortgage lenders and MBS investors.

Protecting Fannie and Freddie’s Golden Future

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Two Golden Eggs

The Federal Housing Finance Agency had requested input on its Update on Implementation of the Single Security and the Common Securitization Platform. By way of background,

The Federal Housing Finance Agency’s (FHFA) 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac includes the strategic goal of developing a new securitization infrastructure for Fannie Mae and Freddie Mac (the Enterprises) for mortgage loans backed by 1- 4 unit (single-family) properties. To achieve that strategic goal, the Enterprises, under FHFA’s direction and guidance, have formed a joint venture, Common Securitization Solutions (CSS). CSS’s mandate is to develop and operate a Common Securitization Platform (CSP or platform) that will support the Enterprises’ single-family mortgage securitization activities, including the issuance by both Enterprises of a single mortgage-backed security (Single Security) and to develop it in a way that allows for the integration of additional market participants in the future. (1)

This is obviously very technical stuff. My own brief comment focused on the need to model and contextualize this development:

FHFA has requested public input on its Update on Implementation of the Single Security and the Common Securitization Platform. The FHFA has made significant progress on the Single Security and the Common Securitization Platform (SS/CSP). In doing so, FHFA has proceeded apace on the technical goals set forth in both the 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac and the 2016 Conservatorship Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions.

Congress’ failure to act on housing finance reform has left it to FHFA to determine the future of the residential mortgage market for the foreseeable future. It is therefore incumbent upon FHFA policymakers to provide further context on how the SS/CSP will operate when fully implemented in 2018.

Thus, FHFA should provide further updates that provide (1) scenarios of how the secondary market may look in 2018 and beyond; and (2) it should also evaluate how SS/CSP would be integrated with the major reform plans that have been proposed by lawmakers and policy analysts, in case Congress were to adopt one of them.

  • FHFA should model how SS/CSP might impact market share of various mortgage originators such as large and small financial institutions as well as how it might impact the credit box for residential borrowers.
  • FHFA should consider how SS/CSP would work with theCorker/Warner bill; the Parrott et proposal; the Bright & DeMarco proposal, among others. FHFA should explain how SS/CSP path dependency might impact each of these proposals. In particular, it should evaluate transition costs that are likely to arise with each option.

FHFA has approached SS/CSP as a technical challenge.  But when implemented, SS/CSP may be setting up a housing finance system that lasts for decades. While Congress has failed to act, FHFA must do its best to evaluate how SS/CSP will affect the housing finance ecosystem.  The stakes for market actors and homeowners are too high not to. (1-2)

The American housing finance system has been the goose that has laid golden eggs decade after decade. We want to be certain that FHFA doesn’t kill it, or even weaken it, unintentionally.

High Risk at Fannie and Freddie

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FHFA Director Watt

The Federal Housing Finance Agency released its 2014 Report to Congress. It summarizes many interim reports and press releases that were released over the previous year, many of which have been covered by REFinBlog as they came out. I was struck, however, by the passages about the operational risk that Fannie and Freddie face.  I have been concerned with operational risk at Fannie and Freddie for some time, as the two enterprises have languished in conservatorship limbo for far too long.

The Report of the Annual Examination of Fannie Mae states that

The level of operational risk remains high and largely reflects the risk posed by execution of Fannie Mae’s strategic plan to replace its existing information technology infrastructure. Management has made significant progress in stabilizing the current information technology environment, with improvements in the change management process and reductions in production outages. Further, progress was made in establishing an out-of-region data center that is a critical component for supporting information systems and providing for business continuity in the event of a disaster. As Fannie Mae implements this plan, however, the level of operational risk will remain elevated. Risks associated with the execution, deployment, and integration with the CSP [Common Securitization Platform] and the move to a Single Security, while addressing ongoing IT infrastructure issues, will also introduce a significant level of inherent operational risk to the organization. Effective project management will be critical to mitigate the operational risk arising from these efforts.(14, emphasis added)

The Report of the Annual Examination of Freddie Mac indicates that Freddie faces somewhat different operational risks:

Operational risk, including risks associated with information technology systems, remains a concern primarily because of resource requirements and operational complexities of major strategic initiatives (including integration with the CSP), developing information security and privacy protection capabilities, and heightened risk during the transition to the new risk management structure.

Information security is one of the primary operational risks Freddie Mac faces given the proliferation of cyber crimes and the high probability of new cyber attacks targeted at large organizations. Freddie Mac’s operational framework is highly complex. Information security within the Enterprise is more important than ever given the pervasiveness of cyber-related threats. In addition to external threats, Freddie Mac faces other challenges that may continue to elevate operational risk and increase the likelihood of significant operational incidents and losses. (17, emphasis added)

While neither of these passages is terrifying — as in, here-is-the-next-trigger-for-a-bailout terrifying — they do make me pause and ask whether the GSEs in their current form are up to the challenge of handling this period of “heightened risk.”

Those in Congress who are impeding GSE reform are on notice that Fannie and Freddie face high levels of operational risk. If the next crisis results from that risk, it is on them.

Realistic Strategies for Consumer Education

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The Consumer Financial Protection Bureau has issued its latest Strategic Plan, Budget, and Performance Plan and Report. I was critical of last year’s strategic plan as it related to financial education. I felt that the CFPB was too optimistic about the efficacy of financial education, given the current state of research on this topic.

I was impressed, however, by the CFPB’s approach in this year’s strategic plan:

The CFPB believes that financial education’s primary goal is to help consumers to take the steps necessary to make choices that will improve their financial well-being and help them reach their own life goals. However, prior to the start of the CFPB’s work, very little empirical research had been conducted in the financial education field regarding what variables measure financial health in terms of real-world outcomes for consumers. By defining these variables through data-driven research, the Bureau will be able to define what knowledge and skills are associated with financial health. This research will inform the Bureau’s ongoing efforts to identify, highlight, and spread effective approaches to financial education. (64)

I am pleased that the CFPB appears to be more skeptical about the efficacy of consumer education in this strategic plan and that is reflected in its performance measure:

FY 2013: Identify variables that are likely to be key drivers of financial health

FY 2014: Develop and test metrics (questions) that accurately measure these variables

FY2015: Develop and implement framework for integration into Consumer Education and Engagement Activities; Complete testing financial health metrics

FY2016: Use metrics to establish a baseline of U.S. consumer financial well-being and begin testing hypotheses of identified success factors in consumer financial decision-making (64-65)

This performance measure does not make assumptions about the efficacy of financial education. By treating the topic like a blank slate, it is more likely that the Bureau will be able to avoid dead ends and blind alleys as it attempts to help people to navigate the world of consumer finance.

This is not to say that the Bureau will necessarily be successful.  But it does appear that the Bureau is not falling for some of the wishful thinking that some of those in the financial education field have succumbed to.

Fannie+Freddie=FRANNIE?!?

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The Federal Housing Finance Agency (FHFA) has posted a Request for Input on “the proposed structure for a Single Security that would be issued and guaranteed by Fannie Mae or Freddie Mac.” The FHFA’s press release states that

The Single Security project is intended to improve the overall liquidity of Fannie Mae and Freddie Mac mortgage-backed securities by creating a Single Security that is eligible for trading in the to-be-announced (TBA) market.  FHFA is requesting public input on all aspects of the proposed Single Security structure and is especially focused on issues regarding the transition from the current system to a Single Security.  Specific questions FHFA is asking relate to TBA eligibility, legacy Fannie Mae and Freddie Mac securities, potential industry impact of the Single Security initiative, and the risk of market disruption.

 The particular questions for which the FHFA invites feedback are

  1. What key factors regarding TBA eligibility status should be considered in the design of and transition to a Single Security?
  2. What issues should be considered in seeking to ensure broad market liquidity for the legacy securities?
  3. As discussed above, this is a multi-year initiative with many stakeholders. What operational, system, policy (e.g., investment guideline), or other effects on the industry should be considered?
  4. What can be done to ensure a smooth implementation of a Single Security with minimal risk of market disruption? (8)

The FHFA states it is most concerned with achieving “maximum secondary market liquidity,” so it is particularly interested “in views on how to preserve TBA eligibility and ensure that legacy MBS [mortgage-backed securities] and PCs [participation certificates] are fully fungible with the Single Security.” (8)

I must say that I am a little skeptical about the reasons for this move to a Single Security. It is unclear to me that this is an urgent need for the FHFA, the two companies, originating lenders or borrowers. While I have no doubt that it could slightly increase liquidity and slightly decrease the cost of credit, I do not see this move as having a dramatic effect on either.

I would say, though, that this move is consistent with an agenda to move toward a new model of government-supported housing finance, one that could contemplate an end to Fannie and Freddie as we know them and the beginning of a more utility-like securitizer like those proposed in the Johnson-Crapo and Corker-Warner bills. Perhaps the regulator will lead the way to housing finance reform when Congress and the Executive have failed to do so . . ..

Input is due by October 13, 2014.