Posts Tagged ‘housing finance agency’

Acting Federal Housing Finance Agency (FHFA) Director Edward DeMarco addressed the 2011 Federal Home Loan Bank (FHLBank) Directors Conference last week and picked up right where he left the group in 2010.

Last year DeMarco criticized the 12 Federal Home Loan Banks for focusing on investments that would allow them to pay out higher dividends to members rather than centering their investment strategies on optimizing core member benefits.  "If a member considers dividends to be the principal benefit of FHLBank membership," he said at the time, "the member should ask itself why it has joined the System in the first place."

Speaking to the 2011 conference DeMarco likened the FHLB stock purchase membership requirement to obtaining a line of credit with a lender, which typically involves the payment of a commitment fee.  In the case of FHLBank membership, that commitment fee is the earnings foregone by purchasing the stock rather than putting those funds to alternative use (like lending).  In either case, the benefit is the ability to access liquidity, but in the case of FHLBank membership, members earn the additional benefit of dividends on the stock.

In a cooperative structure however, DeMarco said, there is inevitably a trade-off between the interest rates charged on advances and the dividends paid to stockholders. Ignoring bank investments, the only way to generate dividends for members would be to charge them rates on advances that exceed the cost of funds and the related expenses.  "Whatever the trade-off, making advances is central to an FHLBank's business, but investments intended to arbitrage the FHLBanks' funding advantages are not."  At the end of Q1 2011, system-wide investments constituted 38.7 percent of all FHLBank assets while advances at 52.4 percent, barely exceeded half.  At six FHLBanks investments exceeded 40 percent of assets, and at four they exceeded advances.  "This is not a sustainable operating condition for an FHLBank," DeMarco said.

As he looks back on history, DeMarco says he sees two lessons.  First, the FHLBanks' various financial problems of the past 20 years have not come from their traditional advances business but from investments and mortgage purchase programs.  Second, a large investment portfolio intended to generate added earnings is inconsistent with the system's purposes and is a misuse of its preferential access to capital markets.

As cooperatives, the FHLBanks differ from other companies in that the focus is not on the market value of its stock and current and future earnings prospects are an issue only so far as they affect the Bank's ability to repurchase its stock.  These differences aside, each FHLBank must still be concerned about its franchise value which will fall unless it satisfies four minimum conditions.  It must be able to maintain its operating costs and maintain adequate capital; be able to price advances competitively, and be able to do both without over-reliance on investments.  The fourth condition is to operate in a fashion consistent with board-approved policies including providing advances on demand at competitive rates and being capable of repurchasing stock at par.

DeMarco said that advances, which should be the primary source of an FHLBank's income, have declined dramatically in recent years.  System wide they peaked at over $1 trillion in September and October 2008 but have since declined by 55 percent to $445 billion.  This is a level that hadn't previously been seen since 2000.  For some Banks the decline is even greater.  This is the result of weak loan demand, the expanded supply of other funding sources, and the failure of member banks and thrifts. 

Other factors could affect the demand for advances in the years ahead. DeMarco cited recent FDIC-announced changes in deposit insurance pricing and market developments such as restrictions on FHLBank activities or the development of a covered bond market.

The advance volume is also related to the Banks' membership base.  Consolidation of depository institutions has reduced the membership base and altered borrowing patterns and, while overall advance volume has decreased system wide, uneven consolidation of member banks has affected some FHLBanks more than others.

DeMarco said a basic long-run franchise value question to consider is "How can an FHLBank maximize the effectiveness and efficiency with which its members realize the benefits of System membership?  As I have argued here and before, these benefits should be provided to members following a business model that predominantly focuses on advance lending, not investment returns."

DeMarco's speech also focused on other FHLBank issues, especially changes that are occurring in the overall financial system.  In what sounded like a subtle warning, he noted that the FHLBanks need to demonstrate that they are meeting a housing finance mission.  He noted that a recent set of Administration recommendations that mostly focused on the Government Sponsored Enterprises did suggested that a bank's membership be limited to a single FHLBank and that the FHLBank's activities be focused on small and medium sized institutions.  DeMarco told Directors that the rule for voluntary merger of FHLBanks is moving forward but this does not mean that a small FHLBank cannot continue to exist as long as its directors understand what is necessary for a small bank to operate profitably.  For example, he said, the board must understand how to price advances such that they generate the require yield, carefully controls costs, and may have to charge higher advance rates or offer more limited dividends to maintain value.

Financing of FHLBanks will also be changing.   Under Dodd-Frank many derivatives contracts will be moving toward central clearing which may have an impact on both the cost of providing advances and on the franchise value issues.  FHLBanks have a responsibility to develop executive compensation packages that conform to new standards and are appropriate and comparable to other financial institutions while recognizing that FHLBanks operate with government support and are less complex entities than commercial banks.

The House Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises held the first of what will probably be a large number of hearings on legislative proposals to overhaul the government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae.  The hearing came one day after the Subcommittee Chairman Scott Garrett (R-NJ) accounced eight bills intended to reform the GSEs. Garrett said the eight bills are merely the first of multiple rounds of Republican sponsored legislation on the subject.

Acting Director of the Federal Housing Finance Agency (FHFA) Edward J. DeMarco was the principal witness at the opening hearing.   DeMarco said that FHFA which has served as conservator of the two GSEs since they essentially failed in August 2008 has three responsibilities; preserve and conserve the GSEs assets, ensure market stability and liquidity, and prepare the Enterprises for an uncertain future.  

DeMarco also commented on each of the proposed bills introduced on Wednesday by House Republicans. One of which would, according to Garrett, ensure that the GSEs are not exempt from new risk-retention rules mandated by Dodd-Frank and that they face the same retention standards as private market participants.  Demarco responded by saying GSE single-family mortgage securities are structured with 100 percent risk retention, far beyond the 5 percent retention required under Dodd-Frank.  "Furthermore," DeMarco said, "since the risk retained by the Enterprises is itself backed by the Treasury (through the Preferred Stock Purchase Agreements (PSPAs)), not by private capital, it is unique from any other 100 percent risk retention structure that might someday exist."

Mortgage News Daily has learned that John Courson, President and CEO of the Mortgage Bankers Association, will announce his resignation later today. Courson has been involved in the mortgage industry for more than 40 years and served as Chairman of the MBA in 2003. From 2004 to 2008, Courson served as Chairman of the Board of Directors of the California Housing Finance Agency, a position for which he was appointed by Governor Arnold Schwarzenegger.

Courson is expected to be replaced by the recently resigned FHA Commissioner David Stevens.

The Home Affordable Refinance Program (HARP) has been extended for another year according to information released on Friday from the Federal Housing Finance Agency.  The program was due to expire on June 30 but will now continue until that date in 2012.   News of the extension comes while a House subcommittee is debating the end of HARPs companion program, the Home Affordable Modification Program (HAMP) and has already voted to kill the FHA Short-Refi program and the new Emergency Assistance Loan Program (EALP) which would provide 23 months of mortgage assistance unemployed and underemployed home owners.  

HARP is designed to assist homeowners who owe more money on their current mortgage that the market value of their home and are thus unable to qualify for a conventional refinance.  Refinancing through HARP, which is administered by the Enterprises Freddie Mac and Fannie Mae, can potentially reduce homeowners' mortgage rates and remove some of the incentives for a strategic default. 

Acting FHFA Director Edward J. DeMarco that that the program will continue operating in the same manner as it has since in was started in 2009 except that Freddie Mac will exempt HARP loans from their recently announced price adjustment and Fannie Mae will conform the eligibility date to May 2009.

The use of HARP more than tripled in 2010.  During the year a total of 6.8 million mortgages were refinanced nationwide and HARP, with 621,803 loan closings, represented nearly 10 percent of the total.  In 2009 190,180 homeowners used the program to refinance.

To qualify for HARP you must currently have a mortgage owned or guaranteed by the Enterprises, have a one year history of on-time payments on your loan, and owe more on your loan than your home is worth.  The loan-to-value, however, cannot exceed 125%. 

The Acting Director of the Federal Housing Finance Agency (FHFA) said this week that risk management is not the only relevant consideration in reforming the nation's housing finance system. 

Edward J. DeMarco, speaking to the 12 Annual Risk Management Convention, said, however, that the characteristics of the government's role in housing and the reform framework that is eventually put in place will define the degree of certainty market participants have regarding their own risk exposure in housing finance.

"The credit policies and guarantees put in place during the GSE reform process will ultimately dictate private investor demand for mortgage-backed securities", says MND's Managing Editor Adam Quinones. "That in turn will determine the level of mortgage rates relative to benchmark yields."

Despite their conservatorship status, DeMarco said, the government sponsored enterprises (GSEs) Freddie Mac and Fannie May remain at the center of the country's housing finance system, but that will have to change.  The longer the future structure of the system remains uncertain, the more the operational risks of conservatorship will continue to emerge.   Improving and simplifying the operations of the GSEs is part of FHFA's duty to preserve and conserve assets and is consistent with the notion of their "wind down," but the ultimate transformation of the GSEs and their market functions will largely depend on actions of Congress and the Administration.  This leaves FHFA with the responsibilities of conservatorship while the long term course is determined. 

The Acting Director of the Federal Housing Finance Agency (FHFA) said this week that risk management is not the only relevant consideration in reforming the nation's housing finance system. 

Edward J. DeMarco, speaking to the 12 Annual Risk Management Convention, said, however, that the characteristics of the government's role in housing and the reform framework that is eventually put in place will define the degree of certainty market participants have regarding their own risk exposure in housing finance.

"The credit policies and guarantees put in place during the GSE reform process will ultimately dictate private investor demand for mortgage-backed securities", says MND's Managing Editor Adam Quinones. "That in turn will determine the level of mortgage rates relative to benchmark yields."

Despite their conservatorship status, DeMarco said, the government sponsored enterprises (GSEs) Freddie Mac and Fannie May remain at the center of the country's housing finance system, but that will have to change.  The longer the future structure of the system remains uncertain, the more the operational risks of conservatorship will continue to emerge.   Improving and simplifying the operations of the GSEs is part of FHFA's duty to preserve and conserve assets and is consistent with the notion of their "wind down," but the ultimate transformation of the GSEs and their market functions will largely depend on actions of Congress and the Administration.  This leaves FHFA with the responsibilities of conservatorship while the long term course is determined. 

The Congressional Oversight Panel assessing the impact of the Troubled Asset Relief Program (TARP) on financial stability is currently holding its last few hearings before issuing a final report.  The panel heard last week from Patrick Lawler, chief economist for the Federal Housing Finance Agency who was asked to address three specific issues from the perspective of FHFA.

The impact of TARP on financial stabilization and recovery in the U.S. economy and financial sector, Fannie Mae and Freddie Mac's responsibilities with respect to TARP, FHFA's interaction with Treasury with respect to the GSE and the federal government's initiatives to promote financial stability.

Despite the current political focus on reforming the housing finance market, the Acting Director of the Federal Housing Finance Agency (FHFA) told an audience that his agency remains committed to meeting the existing goals of the government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae for which FHFA is the conservator.  Edward J. DeMarco, speaking to members of the Mortgage Bankers Association at its National Mortgage Servicing Conference and Expo said that FHFA seeks to retain value in the GSE's business operations and maintain their support for the housing market.

The GSEs have been instructed to undertake several joint initiatives to strengthen their business operations, DeMarco said.  The first, the Loan Quality Initiative (LQI) requires the GSEs to develop standards to improve the quality and uniformity of data collected at the front end of the mortgage process.  If potential defects in the process can be detected at the beginning of the process then it is possible to improve the quality of mortgages the Enterprises purchase which will, in turn, reduce originators' repurchase risk.   LQI is expected to be phased in over the remainder of this year and next.

Second, the Joint Servicing Compensation Initiative will involve the GSEs working with FHFA and the Department of Housing and Urban Development (HUD)) to consider alternative compensation for servicers of single-family mortgages.  The goals of this initiative are to improve service for borrowers, reduce financial risk to servicers, provide flexibility for guarantors to manage non-performing loans, and provide continued liquidity to the "To Be Announced" mortgage securities market.   

DeMarco said that meeting these goals will require taking into account several factors:

The Federal Housing Finance Agency (FHFA) has issued proposed rules regarding private transfer fees on properties securing mortgages intended for sale to Fannie Mae, Freddie Mac, or Federal Home Loan Bank members.  The rules reflect the agency's response to 4,210 letters commenting on a "proposed guidance" outlining the issue in August 2010.  The wave of comments came from interested parties that included legal and trade associations, conservation and other non-profit organizations, condominium associations, title companies, developers, and state and local government.

Transfer fees are contractual arrangements where an owner pays a fixed amount or a percentage of the sales price at the time of transferring the property. The transfer fees in question are collected by third parties each time a property changes hands.  The fees are memorialized in deed covenants and may benefit a homeowners' association, conservation land bank, non-profit organization or any number of other entities.  They are also used by builders and developers to provide themselves with an income stream long after a development is complete.