Legislative and Regulatory Changes – Get educated It’s Coming!

Larry Parks, SVP Federal Home Loan Bank of San Francisco The Power is Now Radio July 1st 2013

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Why is Federal Housing Finance Policy so important to Communities of Color?    

Black homeownership dropped from 49% in 2004 to 44% in 2012 Housing is the best way for working and middle class families to build wealth Racial inequality in wealth passed on from generation to generation Outstanding question of whether investor-led housing recovery will have negative consequences for black community in wealth creation

Current Legislation Legislative Changes – The future of housing finance 

GSE Reform  

FHA Reform Mortgage Interest Deduction

Regulatory Changes – Cleaning up from 2008 financial crisis

Basel III  QM/QRM  FHFA Director 

Current Legislation Overall Principles of Concern Risk Mitigation to Taxpayer vs.

Mission of Government engagement in the housing market

Current Legislation 1.

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The Corker/Warner bill would replace Fannie Mae, Freddie Mac and FHFA with the Federal Mortgage Insurance Corporation (“FMIC”), which would provide insurance in the secondary market for residential mortgage-backed securities and regulate Fannie, Freddie and the FHLBs. Under the insurance program, private MBS issuers would be in a first loss position and FMIC would issue an explicit, feebased, guarantee for secondary losses.

During the five-year transition, Fannie’s and Freddie’s investment portfolios would be reduced at a 15% annual rate.

FMIC would establish the Mortgage Insurance Fund (MIF), paid for through insurance guarantee fees and investments.

Under the bill, the fund must equal at least 2.5 percent of outstanding principal balances of covered MBS.

Current Legislation 5.

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In setting fees, FMIC must consider expenses and risks of MIF. FMIC would approve private MBS issuers which could purchase the guaranty insurance, and FMIC must approve any FHLB that applies to be an approved issuer.

Covered securities insured by FMIC would be exempt from registration under the Securities Act of 1933 and from the Qualified Residential Mortgage (QRM) requirements under the Dodd-Frank Act (i.e., they would not be subject to the 5% statutory risk retention requirement).

Current Legislation 

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S.563 the “Jumpstart GSE Reform Act” was introduced on March 14, 2013 in a bipartisan effort by Sen. Corker (R-TN, with Senators Warner (D-VA), Vitter (R-LA) and Warren (D-MA) as original co-sponsors.

The bill: 

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Prohibits government use of increases in guarantee fee to offset an increase in government spending or a reduction in government revenues for any purpose other than of Fannie/Freddie business purposes and Prohibits Treasury sale or transfer of Fannie and Freddie senior preferred stock absent Congressional approval.

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Current Legislation House Financial Services Committee Capuano Bill – H.R. 2435 

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Under the bill, the Senior Preferred Stock Purchase Agreement entered into by FHFA and the Treasury would no longer accrue dividends, as is current practice.

The federal funds the GSEs received prior to the aforementioned modification would be treated as a loan made by the Treasury to the GSEs that would have to be repaid with 5% interest.

Current dividend payments made by the GSEs would be credited as payments of principal and interest on the Treasury loans.

Elimination of Fannie & Freddie • The number 1 issue with GSEs is to change the narrative • This is beginning to happen because of market forces, the actions of the GSEs and advocates championing a role for GSEs in housing finance

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Elimination of Fannie & Freddie 

Influences 

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Fannie Mae earned $9.6 billion in 3rd quarter of 2012 Freddie Mac earned net income of $11 billion for the full year 2012 Fannie Mae paid $28.5 billion to Treasury in dividends on $116.1 billion in preferred shares owned by Treasury Freddie Mac has paid $21.9 billion in dividends to Treasury on $71.3 billion in preferred stock Pending question of Fannie Mae’s $61.7 billion reversal of write-down of deferred tax assets The substantial sums paid by Fannie and Freddie to Treasury plus the lack of need for Treasury assistance has significantly affected the commonplace argument that the entities are wards of the State 10

Elimination of Fannie & Freddie 

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During the consideration of the Senate Budget Plan on March 22, 2013, Senators Johnson (D-SD) and Crapo (R-ID) offered an amendment to prevent Fannie/Freddie guarantee fees from financing unrelated government spending. The amendment was passed unanimously.

The Senate Budget Committee’s report on its Budget Resolution further expressed views on Fannie/ Freddie.

The report endorsed a slow, deliberate approach to changes for Fannie/Freddie.

It listed as priorities:  Stability in the still fragile housing market and  GSE Reform not coming at the expense of economic growth and upward mobility for hard working families who need access to mortgage credit.

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Elimination of Fannie & Freddie 

FHFA Actions 

On March 4, DeMarco announced as a 2013 goal for Fannie and Freddie the development of a Common Securitization Platform (CSP) to issue Fannie and Freddie MBS. 

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DeMarco said the objective of CSP is “for the platform to be able to function like a market utility, as opposed to rebuilding the proprietary infrastructures” of Fannie and Freddie and that the “overarching goal is to create something of value that could either be sold or used by policy makers as a foundational element of the mortgage market of the future.”

Senators from both parties concerned that these factors could lead to the end of Fannie/Freddie without Congress developing a plan for a new housing finance system.

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Key Outstanding Questions on Federal Role in Housing Finance

Implied Govt. guarantee Homeownership as a goal & policy for working and middle income families?

Fannie & Freddie structure going forward Coop model?

Public interest director on the boards?

Lenders for Homeownership (large banks, community banks, hedge funds) Regulatory impediments under consideration

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QM/QRM & the Potential Impact on Mortgage Finance 

Qualified Residential Mortgage (QRM)   

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Focus on risk retention, if mortgage does not meet QRM then retain 5% QRM mortgage likely to track QM definition for mortgage Originally, QRM had a 20% down payment that is now being reconsidered

QM and QRM together encourage banks to make loans to borrowers with high credit scores and avoid making loans to borrowers with lesser credit scores

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QM/QRM & the Potential Impact on Mortgage Finance 

Qualified Mortgage (QM) 

Depends heavily on underwriter establishing borrower ability to pay. At a minimum, creditors must consider eight underwriting factors:        

Current or reasonably expected income or assets; Current employment status; Monthly payment on the covered transaction; Monthly payment on any simultaneous loan; Monthly payment for mortgage-related obligations; Current debt obligations, alimony, and child support; Monthly debt-to-income ratio or residual income; and Credit history.  Creditors must generally use reasonably reliable thirdparty records to verify the information they use to evaluate these factors.

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QM/QRM & the Potential Impact on Mortgage Finance 

Qualified Mortgage 

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The rules prohibit loans with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years from being qualified mortgages.

Lender has to make certain borrower has ability to repay mortgage

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Dodd/Frank Impact on Mortgage Market ď Ź

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Of all of the Dodd-Frank rules, QM will have the single most significant impact on consumer access to credit and a vibrant, competitive marketplace.

The rule could cause unintentional harm in its current form, making lenders more cautious than they are today.

Coming Down the Pipeline 

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Banking agencies will issue Basel III capital rules in the next few months. Proposed Basel III liquidity rules are likely 2-3 months after the capital rule.

Congress has weighed in on a bipartisan basis on the Basel III Capital Rules. The focus has been risk weighting for mortgages and second liens. Pressure has been placed to reduce the risk weights for both types of mortgages.

Bipartisan outreach has occurred in letter form from the Senate and House to the regulators on the small bank issues. FDIC Chairman Gruenberg appears to be taking the needs of smaller banks in consideration of Basel III rules.

Agencies/Fed will be voting tomorrow on the capital rules of Basel III.

Basel III Liquidity High Quality Liquid Assets = 100% of bank’s estimated net capital flow for a 30-day period.

HQLA Level 2 Level 1 40% of liquid assets Cash, securities insured

by U. S. government or 0% risk-weighted sovereign

2B Debt of FHLBs, Fannie/Freddie, MBS with risk-weight of 20%, covered bonds, nonfinancial corporation bonds rated AA- or higher (-15% haircut)

2A MBS of AA or higher with full recourse mortgages only 25% haircut, corporate debt of A+ to BBB subject to 50% haircut 19

Coming Down the Pipeline 

Some local housing finance agencies and some community banks are reaching out to regulators to modify Basel III liquidity rules before regulation is issued. They are focused on:   

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Liquidity credit for FHLB advances; Lower haircut for FHLB debt used for liquidity purposes; and Closer alignment in the treatment of advances and deposits in determining the rate of funds run-off under the liquidity standards

Fed Governor Stein (member of the Fed Board of Governors), in April stated that while Basel III liquidity rules are likely this year, regulators need to know more about the costs of liquidity regulation vs. capital rules. He therefore called for flexibility in approaching liquidity regulation.

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FHFA ď Ź

Watt hearing as FHFA Director

Coming Down the Pipeline 1) Fix what is broken with the current intermediaries; 2) Ensure continued access to low cost, universal credit; and 3) Push for housing finance to have transparent open regulatory structure that balances consumer needs, risk mitigation and broad credit access.

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