MBA Offers FHFA Recommendations on GSE Strategic Plan

The Mortgage Bankers Association, in comments to the Federal Housing Finance Agency, said the FHFA Strategic Plan for fiscal years 2021-2024 should continue to work toward an ultimate goal: releasing Fannie Mae and Freddie Mac from federal conservatorship—but only when they are able to do so without risk to the real estate finance markets.

“MBA strongly supports the three overarching goals that FHFA identifies and describes in the Strategic Plan: Ensure safe and sound regulated entities through world-class supervision; foster competitive, liquid, efficient and resilient national housing finance markets; and position FHFA as a model of operational excellence by strengthening the workforce and infrastructure,” wrote MBA President and CEO Robert Broeksmit, CMB.  “Each of these goals is critical to maintaining a housing finance system that facilitates broad access to credit for qualified borrowers while also promoting competitive markets and protecting taxpayers. MBA firmly believes that the Enterprises should be released from conservatorship only when they have the financial strength to do so and after important market conduct reforms are made sufficiently durable.”

The 2021-2024 Strategic Plan (https://www.fhfa.gov/AboutUs/Reports/Pages/FHFA-Strategic-Plan-Fiscal-Years-2021-2024.aspx), issued in September, outlines steps FHFA intends to take to prepare for its post-conservatorship role. The new Strategic Plan outlines critical milestones that will “guide FHFA’s efforts to ensure that its supervision and regulation of the Enterprises is strong and well-executed once outside the framework of conservatorship.”

MBA offered the following recommendations:

—Responsibly End the Conservatorships of the Enterprises. “One of the proximate causes of the Enterprises’ distress in 2008 was the insufficient capital they maintained,” MBA wrote. “If the Enterprises are to once again operate outside the confines of conservatorship, they must be subject to a more robust capital framework that corrects the failings of prior frameworks.”

MBA said progress towards establishing adequate financial strength at the Enterprises has taken the form of FHFA’s recent rulemaking efforts to develop a new set of capital requirements for the Enterprises. “The re-proposed rule that would institute these new capital requirements is significantly improved from the previous version in some respects, although MBA remains concerned about specific elements of the proposed framework, including the manner in which it recognizes the protection offered by credit risk transfer (CRT) mechanisms,” the letter said. “We urge FHFA to ensure that any strategic planning for releasing the Enterprises from conservatorship responsibly reduces taxpayer risk by providing sufficient capital and other incentives to continue their CRT activities.”

—Government Support for the Enterprises. MBA said prior to release of the Enterprises from conservatorship, FHFA and Treasury should clarify precise parameters of any government support or backstop for the Enterprises.

—Market Conduct of the Enterprises. MBA said reforms to the capital framework and government backstop are only two components of a larger set of reforms needed to create a solid foundation for the Enterprises to operate safely and effectively outside of conservatorship. MBA believes that the Enterprises should not be permitted to exit conservatorship until further systematic, wholesale and long-term reforms are made sufficiently permanent.

—Equal Access to the Secondary Market. MBA said the Enterprises should facilitate access to the secondary market on equal terms for lenders of all sizes and business models. “Such a framework is key to promoting access to mortgage credit throughout the nation and discouraging concentration in the primary single-family mortgage market that is divorced from market-based factors,” MBA said.

—New Activities or Products. MBA said market conduct reforms also are needed to establish appropriate limits on activities undertaken by the Enterprises and to clarify the standards for the development of new products, activities, and technologies. “As the Enterprises continue to partner with other market participants to innovate by developing new products and activities, it is important that the processes by which these measures are undertaken are fair, transparent and supportive of the overall market,” the letter said. “FHFA should enhance the approval process for new Enterprise products, activities and technologies by instituting clear criteria for FHFA’s evaluation, as well as provide clear parameters on the process by which the Enterprises offer pilot programs or other ‘early-to-market’ opportunities. 

—Uniform MBS. MBA also noted it has consistently supported development of the single-family Uniform Mortgage-Backed Security and recognizes the many short- and long-term benefits that will come from the transition to the new market structure, including enabling a more efficient, resilient, and liquid secondary market. “These positive initial developments do not obviate the need for continued monitoring of liquidity metrics, prepayment rates, and general market activity by FHFA and the Enterprises,” MBA said.

Financial Requirements for Enterprise Counterparties. Objective 2.1 of the Strategic Plan includes the sub-objective of establishing standards for sellers, servicers, and counterparties of the Enterprises. MBA said it generally supports these efforts, “as we understand the need to ensure Enterprise counterparties have sufficient financial strength.”

—Examination Authority over Enterprise Counterparties. The Strategic Plan said lack of examination authority to “examine important counterparties of its regulated entities, such as nonbank servicers,” could interfere with its “ability to ensure the safety and soundness of the regulated entities and the resilience of the nation’s mortgage markets.”

However, MBA said the rationale for this concern is unclear because Congress envisioned FHFA as a prudential safety and soundness regulator of the Enterprises (and the Federal Home Loan Banks), not as a marketplace regulator. “Direct FHFA examination of non-depository institutions, moreover, largely would be duplicative of the efforts already carried out by primary state regulators, the Enterprises, Ginnie Mae, warehouse lenders and other counterparties,” MBA said. “Additionally, there are no parallel examples of examination authority given to any federal agencies over customers of regulated entities. As such, FHFA direct oversight of Enterprise customers would be very different than oversight of Enterprise vendors or service providers as part of FHFA’s prudential supervision program.”

MBA insisted FHFA’s existing examination authority with respect to the Enterprises “provides sufficient flexibility and access to address any prudential concerns related to the Enterprises’ counterparty relationships. Prudential regulation of the Enterprises should not extend to broad examination authority over all stakeholders and participants in the housing finance ecosystem, including Enterprise customers.”