The Federal Housing Finance Agency continues to implement significant changes — albeit quietly — to the structure of Fannie Mae and Freddie Mac, even while the Obama administration and Congress have yet to get serious about housing finance reform.

The latest move came in March, when the agency released its goals for this year and Acting Director Edward DeMarco delivered an update on the progress the FHFA has made so far.
The result was a raft of headlines that largely discussed just one aspect of DeMarco’s talk — the creation of a joint securitization platform by Fannie and Freddie that will eventually become independent from the mortgage giants.

DeMarco later elaborated on his plan in testimony before the House Financial Services Committee. “I think this could serve as a building block for Congress to realize a future mortgage market,” he told lawmakers.

“I spent a lot of time thinking as conservator of two companies that the administration says it wants to wind down, how do I invest taxpayer dollars in continuing to develop and strengthen the underlying infrastructure of their securitization business using taxpayer money when we are expected ultimately to wind these things down?”

DeMarco stressed this was not a consolidation of the two enterprises, but rather an attempt to create a platform that functions like a market utility instead of rebuilding Fannie and Freddie’s infrastructure.

“We are designing this to be flexible so that the long-term ownership structure can be adjusted to meet the goals and direction that policymakers may set forth for housing finance reform,” said DeMarco.

He said he anticipates that the utility would be structured in such a way that it could provide a federal guarantee to mortgage-backed securities, but does not necessarily have to.

“They would not presumably be the guaranteed entity providing that guarantee for the government,’ said DeMarco. “This is the operational platform under which the securities would be produced and sold into the marketplace and because it would be done as a market utility that consistency would make the market more liquid.”

DeMarco has said from the outset that the agency expects this to be a multiyear effort.

“I would like to see this transition be done within five years, but beyond that it would be very hard to put a strict timeline on something when you are still in the design phase trying to scope out what it is and you know it’s a pretty material undertaking,” said DeMarco.

We offer the following frequently asked questions about DeMarco’s comments and what they mean for the mortgage market and the fate of housing finance reform.

What exactly did FHFA announce?
The big news was about the securitization platform, which DeMarco said will essentially combine the GSEs’ back-office activity into one entity that will issue securities, provide disclosures, pay investors and disseminate data. The platform will initially be formed and funded by Fannie and Freddie, but eventually be fully independent, with its own executive and board of directors.

Why is that important?
It’s a concrete sign that Fannie and Freddie, in their current form, are disappearing. Since being seized by the government four and a half years ago, FHFA has talked repeatedly about the need to wind down the entities and prepare for a future housing finance system. Creating a single securitization platform for both companies is a large step in that direction.

Was it a surprise?
No. The FHFA released a white paper in October which discussed the need to standardize securitization operations at the two companies, and raised the possibility that the two entities would be merged. Prior to that, DeMarco has signaled that the agency intends to move along these lines.

Is there anyone who opposes it?
The financial services industry isn’t opposed per se, but it does have reservations. In a joint letter sent in December from several different trade groups, the industry raised concerns about the ownership of the platform. DeMarco appears to be trying to placate those worries by emphasizing that the new platform will be independent of the GSEs, including being located in a separate space. DeMarco also said the agency was open to additional industry feedback.

Does this reduce the need for GSE Reform?
No. While this takes one more step in preparing for the future of the housing finance system, no one — including DeMarco — thinks it will preclude the need for actual legislation. The key point DeMarco made was that the agency was trying to be flexible here to accommodate whatever Congress eventually wants to do. “The overarching goal is to create something of value that could either be sold or used by policymakers as a foundational element of the mortgage-market of the future,” he said.

Is GSE reform going to happen?
Not anytime soon. The Obama administration appears to view the issue as radioactive and has given no sign it intends to tackle it in the near future. Given that Treasury Secretary Jack Lew just stepped into office in February and already faces issues dealing with the sequestration, a concrete GSE plan doesn’t appear in the offing.
House Financial Services Committee Chairman Jeb Hensarling, meanwhile, has promised to make the issue a priority. To date, however, the panel has only scheduled a subcommittee hearing related to the issue entitled “How Government Housing Policy… Led to the Financial Crisis.” If the best Congress can do now is rehash a debate that has already been fought for the past four years, GSE reform is going nowhere fast.

Did DeMarco say anything else?
The FHFA chief also said the FHFA is expected to force Fannie and Freddie to raise guarantee fees shortly. The agency has been gradually hiking g-fees in order to encourage private investment back into the market. “We are not there yet, but in conversations with market participants, I think we are getting closer.”
The agency has also set a target of $30 billion of unpaid principal balance in credit risk sharing transactions with Fannie and Freddie and is targeting a 10% reduction in the GSEs’ multifamily business, which has been a bright spot in recent earnings reports. DeMarco also said the agency would be taking a harder look at mortgage insurers and consider a systemic approach to curbing force-placed insurance.

Didn’t FHFA just kill a force-placed insurance plan at Fannie?
Yes. The agency vetoed a Fannie proposal that its supporters say would have saved the company — and taxpayers — hundreds of millions of dollars. Rep. Maxine Waters, the top Democrat on the House Financial Services Committee, is seeking to know why.
In his speech, DeMarco attempted to offer an explanation, saying the agency does not want Fannie to handle the situation by itself.
“We have taken a pause in pursuing an enterprise-centric approach,” DeMarco said. “We plan to bring together a wide range of stakeholders to further analyze how standards can be set that could be more broadly applied to the mortgage market.”

Is he serious or is this just a cover?
That depends on whom you ask. Jaret Seiberg, an analyst with Guggenheim Partners, said “FHFA seems serious about finding a long term solution,” but acknowledged that other issues might take priority. A research note from Compass Point was more skeptical.
“In our view, this commitment to more broadly assess the lender-placed insurance market appears more as window dressing than a substantive shift in policy,” the firm wrote.

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