Thank you for having me here this morning. It’s a pleasure to have my first opportunity to share the stage with Secretary Castro. And, of course, I’m always happy to have the opportunity to talk about the important progress we are making at the Federal Housing Finance Agency (FHFA) to meet our obligations to ensure safety and soundness and liquidity in the housing finance market. I am very pleased to be speaking to mortgage bankers who play an important role in our housing market.
As regulator of the Federal Home Loan Banks and as regulator and conservator of Fannie Mae and Freddie Mac (the Enterprises), we are working on a number of issues at FHFA that relate to our statutory obligations. We recently requested input and comment on several issues involving the Enterprises, including guarantee fees, eligibility requirements for their private mortgage insurer counterparties, proposed housing goal levels for 2015 through 2017, and a proposed Single Security structure. We have also requested comment on a Proposed Rule concerning the membership standards for the Federal Home Loan Banks.
In addition to these issues and proposals, FHFA continues to work on other priorities as well. We know that access to credit remains tight for many borrowers, and we are also working to address this issue in a responsible and thoughtful manner. Additionally, FHFA continues to evaluate ways to refine and improve the loss mitigation and foreclosure prevention policies at the Enterprises, because we understand that many individuals and families are still facing the possibility of foreclosure and are looking for alternatives to stay in their homes. I want to assure you that we are hard at work and making good progress on all these issues, several of which I will highlight in my remarks today.
Let me start by talking about one of FHFA’s key initiatives, revising and clarifying the Representation and Warranty Framework (Framework) under which lenders and the Enterprises operate. As you know, these representations and warranties provide the necessary assurances that allow Fannie Mae and Freddie Mac to purchase loans in an efficient and responsible manner without checking each loan individually or being at each closing. They also provide the Enterprises remedies to address situations where a lender’s obligations to meet the Enterprises’ purchase guidelines have not been fully met.
Over the last several years, we have worked to refine the Representation and Warranty Framework and to have the Enterprises place increased attention and resources on upfront quality control reviews. As part of this process, we have listened closely to your concerns about the impact that loan repurchases have had on your businesses, and we understand that addressing these concerns in ways that are mutually satisfactory to you and the Enterprises is critical to ensuring that there is liquidity in the housing finance market and to providing access to credit for borrowers.
We know that the Representation and Warranty Framework did not provide enough clarity to enable lenders to understand when Fannie Mae or Freddie Mac would exercise their remedy to require repurchase of a loan. And, we know that this issue has contributed to lenders imposing credit overlays that drive up the cost of lending and also restrict lending to borrowers with less than perfect credit scores or with less conventional financial situations.
To address this problem, FHFA and the Enterprises have worked to revise the Framework to ensure that it provides clear rules of the road that allow lenders to manage their risk and lend throughout the Enterprises’ credit box. These revisions are consistent with our broader efforts to place more emphasis on upfront quality control reviews and other risk management practices that provide feedback on the quality of loans delivered to the Enterprises earlier in the process.
The first improvements to the Framework went into effect in January of 2013. These improvements relieved lenders of representation and warranties obligations related to the underwriting of the borrower, the property or the project for loans that had clean payment histories for 36 months. In May of this year, FHFA and the Enterprises announced additional refinements to provide greater clarity around this 36-month benchmark. These changes included:
• Revising the payment history requirement to allow up to two 30-day delinquencies in the first 36 months after acquisition;
• Providing loan level confirmations when mortgages meet the 36-month performance benchmark or pass a quality control review; and
• Eliminating automatic repurchases when a loan’s primary mortgage insurance is rescinded.
As I committed FHFA to do when I announced these refinements in May, we have continued to engage in an ongoing process to address the issue of life-of-loan exclusions. Life-of-loan exclusions are designed to protect Fannie Mae and Freddie Mac from instances of fraud or other significant noncompliance, and, as a result, they allow the Enterprises to require lenders to repurchase loans at any point during the term of the loan. The current life-of-loan exclusions are open-ended and make it difficult for a lender to predict when, or if, Fannie Mae or Freddie Mac will apply one of them.
So, we have continued to address this issue, and I can report that we have reached an agreement in principle on how to clarify and define the life-of-loan exclusions. These changes are a significant step forward that will result in a better Representation and Warranty Framework and facilitate market liquidity without compromising the safety and soundness of the Enterprises.
First, we are more clearly defining the life-of-loan exclusions, so lenders will know what they are and when they apply to loans that have otherwise obtained repurchase relief. These exclusions fall into six categories: 1) misrepresentations, misstatements and omissions; 2) data inaccuracies; 3) charter compliance issues; 4) first-lien priority and title matters; 5) legal compliance violations; and 6) unacceptable mortgage products.
Second, for loans that have already earned repurchase relief, we are clarifying that only life-of-loan exclusions can trigger a repurchase under the Framework. This is a straightforward clarification, but one that we believe will reduce confusion and risks to lenders.
The Enterprises will provide details about the updated definitions for each life-of-loan exclusion in the coming weeks, but let me spend a minute highlighting some aspects of the refined definitions for the first two categories – misrepresentations and data inaccuracies.
In defining both of these categories, we are setting a minimum number of loans that must be identified with misrepresentations or data inaccuracies to trigger the life-of-loan exclusion. This approach allows the Enterprises to act when there is a pattern of misrepresentations or data inaccuracies that warrant an exclusion, but not to revoke repurchase relief they have already granted if they subsequently discover that a lender incorrectly calculated the debt-to-income ratio or loan-to-value ratio on a single loan.
We are also adding a “significance” requirement to the misrepresentation and data inaccuracy definitions. In order to require repurchase of a loan under the misrepresentation or data inaccuracy categories, the “significance” test requires the Enterprises to determine – based on their automated underwriting systems – that the loan would have been ineligible for purchase initially if the loan information had been accurately reported.
Under the revised and modified Framework, the Enterprises will retain their ability to conduct quality control reviews at any time, of course, because this is essential to their risk management practices and is essential to their ongoing safety and soundness. In addition, the Enterprises will continue to engage in transactions that sell a portion of the credit risk from new mortgage purchases to the private market. I announced in May that we tripled the credit risk transfer goal for this year, and both Enterprises are currently on track to exceed it.
After FHFA and the Enterprises release the details shortly on these life-of-loan exclusions, there still remains more work to be done on our Representation and Warranty Framework. On the origination side, FHFA is already focused on developing an independent dispute resolution process. We are also identifying cure mechanisms and alternative remedies for lower-severity loan defects. FHFA also continues to make progress on issues concerning servicing representations and warranties, and we have reached an agreement in principle on modifying compensatory fees and foreclosure timelines. The Enterprises will announce details on these changes in the near future.
During my tenure as Director of FHFA, we have made substantial progress by working together and I believe we can sustain this progress. We have started to move mortgage finance back to a responsible state of normalcy – one that encourages responsible lending to creditworthy borrowers while maintaining safety and soundness of the Enterprises. While there is still more to do, FHFA and the Enterprises have demonstrated the willingness and commitment to develop a better Representation and Warranty Framework for all parties.
We recognize that you are essential stakeholders in this process. As lenders, you play a central role in the overall housing market, and the work you do touches borrowers in communities across the country. You help individuals and families become homeowners. For many of them, this is the single largest investment they will ever make. To fulfill both sides of our shared responsibility, I hope our actions provide sufficient certainty to enable your companies to reassess existing credit overlays and more aggressively make responsible loans available to creditworthy borrowers. This will result in a housing market that is not only better for borrowers, but also better for the Enterprises and lenders and beneficial to our country.
To increase access for creditworthy but lower-wealth borrowers, FHFA is also working with the Enterprises to develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97 percent. Through these revised guidelines, we believe that the Enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower-down payment mortgages by taking into account “compensating factors.” While this is a much more narrow effort than our work on the Representation and Warranty Framework, it is yet another much needed piece to the broader access to credit puzzle. Further details about these new guidelines will be available in the coming weeks as we continue to advance FHFA’s mission of ensuring safety, soundness and liquidity in the housing finance markets.
Now, let me turn my attention to the continuing progress we are making in the multiyear process of developing the Common Securitization Platform (CSP), which will create a shared securitization infrastructure for Fannie Mae and Freddie Mac. As I announced in May, we are focusing on ensuring that the CSP fills the needs of Fannie Mae and Freddie Mac to carry out most of their current securitization functions. To achieve these objectives, FHFA and the Enterprises have revised the governance structure and operating agreement for Common Securitization Solutions (CSS). CSS is a joint venture owned by both Fannie Mae and Freddie Mac and is the corporate entity that we expect ultimately to house and operate the Common Securitization Platform.
Under the updated structure, CSS will be governed by a four-person Board of Managers, with each Enterprise naming two members to the Board. All Board members will have equal votes, and the Board Chair will rotate between these members. This Board structure will enable CSS to develop and operate the Common Securitization Platform in a way that best supports the Enterprises’ current securitization needs and functions. At the same time, our teams continue to ensure that we leverage industry standards and technology where possible to make sure that the CSP will be usable by other secondary market participants in the future. FHFA will continue to be an active participant with the Board and will provide our input as part of our ongoing oversight of the Enterprises to assure that our objectives are achieved.
In addition to completing the structure of the Board of Managers, we are close to being able to announce the selection of a Chief Executive Officer for CSS who will report to the Board of Managers. I anticipate that a formal announcement of the new management structure and the identity of the CEO will be made before the end of the year.
In the meantime, FHFA and the Enterprises have also made considerable progress on the design-and-build phase of the CSP. Each Enterprise has designated staff to work on the project at the CSS location, and during 2014, this team has been developing the technology and infrastructure of the CSP platform. FHFA announced earlier this year that we would leverage the creation of the CSP to establish a Single Security – which we believe should reduce trading disparities between Fannie Mae and Freddie Mac securities – and this team has also incorporated work on the Single Security into the development of the CSP.
The CSP is more than a simple technology project, and it will require significant changes to each of the Enterprises’ business practices. Fannie Mae and Freddie Mac have reorganized their staffs with business operations and information technology experts to develop the systems and processes needed to integrate with the CSP. As this work continues, Fannie Mae and Freddie Mac staff will engage in continuous testing and will develop operating policies and procedures to ensure a smooth transition to the CSP. FHFA, Fannie Mae, and Freddie Mac are committed to achieving a seamless CSP launch, and the actions taken so far are moving us in the right direction toward this multi-year goal.
Finally, while I don’t have sufficient time to do justice to a full discussion of this today, I do want to note before I close that FHFA recently extended the comment period for a Proposed Rule dealing with the membership requirements of the Federal Home Loan Banks. In light of the importance of the issues surrounding the membership rule, FHFA decided to extend the initial 60-day comment period for an additional 60 days until January 12, 2015. I know that many MBA members are also members of a Federal Home Loan Bank, and I hope you will take the opportunity to provide FHFA with your feedback and ideas on this Proposed Rule. As I have consistently done since becoming Director of FHFA, I want to emphasize that getting input and feedback from stakeholders is a crucial part of FHFA’s policymaking process. So give us your input, not only on our FHLB Proposed Rule, but on other policy initiatives and decisions we are evaluating.
Thank you very much for having me here this morning and for giving me the opportunity to share my views on topics that I know are of interest and importance to all of us. I look forward to our ongoing dialogue and to continuing our efforts to achieve our shared goals of restoring safety and soundness and liquidity to the nation’s housing finance market.