Speaking at the Mortgage Bankers Association Annual Convention earlier today, Federal Housing Finance Agency director Mel Watt laid out some of the changes that he’s working on along with Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) to improve credit availability and move towards the common securitization platform (CSP). But all this activity seems to contradict the story that FHFA is in the process of winding down the GSEs over the next several years.
Fannie Mae, Freddie Mac: Clarifying life-of-loan exclusions
One of the changes meant to prevent Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) from getting stuck with defective mortgages like they did during the financial crisis is the Representation and Warranty Framework, which lets the agencies force sellers to buy loans back at any point, the life-of-loan exclusions.
“Life-of-loan exclusions are designed to protect Fannie Mae and Freddie Mac from instances of fraud or other significant noncompliance,” explains Watt. But he acknowledges that, “The current life-of-loan exclusions are open-ended and make it difficult for a lender to predict when, or if, Fannie Mae or Freddie Mac will apply one of them.”
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To help remedy that, Watt announced that FHFA is setting more explicit guidelines for when life-of-loan exclusions can be used falling into one of six categories: “misrepresentations, misstatements and omissions; data inaccuracies; charter compliance issues; first-lien priority and title matters; legal compliance violations; and unacceptable mortgage products.”
He also said that the misrepresentations and inaccuracies would have to be significant to qualify: if the correct information wouldn’t have prevented lenders from selling the mortgage on to the GSEs then it isn’t grounds for repurchase either.
More details on CSS governing structure
Watt also gave us some more information about how the Common Securitization Solutions (CSS) behind the CSP would actually work. The CSS will be run by a four-person board with two appointees each from Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). The board chair will rotate between the four members, but they will all have equal votes and the board will choose the CSS CEO, among other responsibilities.
Watt also said that he expects to announce the first CSS CEO by the end of the year so that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) will be able to begin transitioning to the new common platform straight away. That’s promising for people who argue that the GSEs are essential to the US housing market, but not necessarily for private shareholders. As the GSEs’ governing structure changes to reflect the kind of platform proposed in Crapo-Johnson and other stalled legislative proposals, it only becomes more difficult to imagine the government changing course and reprivatizing them.