FHFA Conservator: GSE Transition Could Take ‘Years’

NEW YORK–Comprehensive reform of Fannie Mae and Freddie Mac has to go through Congress. But the road also travels through the Federal Housing Finance Agency, which says the process could take several years to fully implement.

FHFA, which assumed safety and soundness responsibility for Fannie Mae and Freddie Mac in September 2008 when the federal government placed the government-sponsored enterprises into conservatorship, has very much a say in the enterprises’ future, said Robert Ryan, FHFA special advisor and acting deputy director or the division of conservatorship.

Speaking here at the MBA National Secondary Market Conference & Expo, Ryan praised the recent white paper from MBA on GSE reform. “The MBA proposal touches on a lot of key principles,” he said. “And it’s encouraging to see Congress and the Administration focusing on GSE reform.”

“Transition will be the key issue,” Ryan said. “We have to ensure a transition that doesn’t disrupt the market. That’s what makes this such a key challenge. We know the market operates very efficiently right now. There have been a lot of reform over the past eight or nine years, so we want to ensure that there is continuity.”

Ryan insisted that the process cannot be rushed. “That’s not to say that there can’t be a radical change, but if there is we need to be prepared for it,” he said. “There are a lot of moving pieces, and to ensure that they operate in a clear way is important.”

Ryan noted that the second test phase of the GSEs’ single-security, scheduled for 2019, is on schedule; the first phase took place this past November. “The biggest lessons learned out of the Release 1 exercise is just how long it takes to perform all the necessary testing of systems,” he said. “It is part of the business that will have to process $5 trillion in mortgage-backed securities. You don’t want to make a mistake. So we are going to take our time on this and make sure we get this right.”

Four years since the GSEs began credit risk transfers, Ryan said FHFA would like to see more diversity in buyers. “We’re looking at how to get other investors engaged in the marketplace, such as REITs (real estate investment trusts),” he said.

Having said that, Ryan noted that dealers have seen improved liquidity. “We’d also had a big run where spreads on the transfer of credit risk have widened,” he said. “Now things are tightening up, which is a positive development.”

The GSEs will release their new Duty-to-Serve guidelines shortly. FHFA requires Fannie Mae and Freddie Mac to facilitate a secondary market for mortgages on housing for very low-, low-, and moderate-income families in three underserved markets specified in the statute, including manufactured housing, affordable housing preservation and rural housing.

“We want to help improve liquidity in these marketplaces, so that we have more affordable homeownership and more sustainable rental properties,” Ryan said. “The Enterprises will be releasing those shortly and FHFA will spend the summer evaluation those plans. It’s important that we hear from stakeholders in the process and we encourage you to provide feedback.”

Ryan said that FHFA is encouraged by reforms to reps and warranty provisions. “The rep and warrant guidelines have been functioning well and have provided clarity to the process,” he said. “We’re seeing the credit box expanding, but the market is still geared toward the upper end of the market.”

Earlier this year, Fannie Mae expanded into the single-family rental arena. “It’s clearly been a source of big growth in the marketplace,” Ryan said. “Fannie Mae and Freddie Mac have always engaged in a fair amount of rental properties, and single-family rental makes up more than half of the marketplace. What is changing is that the institutional model for single-family rental is different. There are also concerns that it’s taking units off the market for purchase. Already we have a tight market as far as availability. We want to make sure–and this shouldn’t be viewed as moving away from homeownership–is that an opportunity exist to make rents more affordable.”