MBA Letter Urges Tighter, More Transparent Supervision of GSE Activities

Mike Sorohan msorohan@mba.org

June 05, 2018

The Mortgage Bankers Association, in a letter yesterday to the Federal Housing Finance Agency, offered a number of policy recommendations, including that FHFA should increase transparency in its approval process for new products and activities undertaken by Fannie Mae and Freddie Mac.

The letter comes at the request of FHFA, which asked for industry comments on its existing regulations that guide its oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks, other than those adopted or substantially amended over the past two years.

Supervision of GSEs
The letter noted while Fannie Mae and Freddie Mac have continued to innovate by developing new activities and new products that serve a number of varying functions in the mortgage market, many of these activities have raised "significant questions regarding their contributions to the public interest.

"MBA strongly believes in the need for responsible innovation, as well as targeted competition between the Enterprises, which together can contribute to better customer service or secondary market executions for lenders. These outcomes should lead to more robust markets that facilitate access to credit for a broader array of borrowers," the letter said. "It is important to note the unique and sizable impact that the Enterprises have in the mortgage market, as well as the fact that they remain backed by U.S. taxpayer funds...[we] have become concerned in recent years with a lack of transparency in the FHFA approval process for new activities and new products."

For example, MBA said, little or no public information has been released regarding design of many new activities and new products. Similarly, there is little transparency with respect to the specific factors evaluated by FHFA in its reviews.

"This process has made it far more difficult for policymakers, market participants and other stakeholders to understand whether certain offerings are serving the public interest," MBA said. "The lack of transparency also contributes to the concern that new activities or new products could at times be structured in ways that confer competitive advantages on certain market participants. An important recent example is the use of a single vendor for various aspects of a major Enterprise technology project, thereby forcing many lenders to choose whether to retain their existing vendors or switch to the lone ‘approved' vendor."

To restore confidence that the Enterprises' are innovating in ways that promote efficiency, enhanced competition and robust markets, MBA recommended a number of revisions to FHFA regulations:

--FHFA could improve transparency regarding new activities by revising 12 CFR § 1253.3 to require public disclosure of any Notice of New Activity--even if such activity is not deemed to be a new product and receives a non-objection from FHFA.

--FHFA could explicitly specify the factors it will consider when determining whether a new activity constitutes a new product that is subject to public notice and comment. For example, MBA noted the definition of a "new product" in 12 CFR § 1253.2 features a number of activities that are specifically deemed to not constitute new products, but the only affirmative characteristic of a new product is that the FHFA director determines that it "merits public notice and comment on matters of compliance with the applicable authorizing statute, safety and soundness, or public interest."

--To improve transparency in FHFA's determination as to whether a new activity constitutes a new product (and therefore requires public notice and comment), MBA recommended FHFA specify the applicable factors under 12 CFR § 1253.3.

--FHFA should modify the manner in which it addresses new activities denominated as "pilots." "Despite the limitations conferred by pilot status, such activities by an Enterprise could have widespread and lasting effects on markets and competition, which may or may not be in the public interest," MBA said. To better determine whether a pilot is serving the public interest, greater transparency should be promoted through a revision to 12 CFR § 1253.3 to include a requirement that the Enterprise or FHFA disclose to the public relevant information regarding the size, scope, participants and expected duration of the pilot. FHFA should also require the Enterprise to take measures to ensure a sufficient diversity of participants across a number of dimensions, unless there is a compelling business reason or impracticality associated with doing so. These measures should help ensure that new activities are not immune from the necessary requirements of the review process purely because they are initially structured as pilots.

GSE Multifamily Activities
On the multifamily front, MBA noted Fannie Mae and Freddie Mac play a significant ongoing role in the multifamily sector, particularly for workforce and affordable rental housing. MBA urged FHFA to adopt a "do no harm" approach as it engages in any activity under its current or future regulations. "Such an approach recognizes the strength of the Enterprises' multifamily businesses and other capital sources in this market, as well as the need to avoid the potential for market disruption that could adversely affect the rental market in a disproportionate manner," MBA said.

Mortgage REITS and FHLB Membership
The letter expresses MBA's concerns that a 2016 rule issued by FHFA in early 2016 inappropriately excludes from Federal Home Loan Bank eligibility an important subset of institutions that do further these public policy objectives: the captive insurance affiliates of mortgage real estate investment trusts.

"Mortgage REITs are financial institutions that invest almost exclusively in real estate-related assets as a condition of their business models and tax structures," MBA said. "In doing so, they serve as a vital source of private capital in mortgage markets, facilitating lending to a broad set of borrowers. These borrowers include those with strong credit profiles who struggle to access affordable credit because they are not able to secure loans that meet the Qualified Mortgage standard."

MBA said mortgage REITs, at the very core of their operations, maintain a commitment to housing finance that warrants eligibility for FHLB membership. "Their access to FHLB advances through their captive insurance affiliates allows them to further this commitment in a safe, responsible manner that diversifies the sources of private capital serving borrowers in the housing finance system," the letter said.

Acceptance of eNotes
MBA said FHFA should ensure that its existing regulations do not unintentionally stifle innovation by restricting the growth of eNotes. An important example is the inability of FHLB members to access advances against eNotes.

"While FHFA has specifically directed the Enterprises to facilitate the use of eNotes in the market, many FHLBs continue to express concerns that FHFA does not support advances against eNotes," MBA said. "This inconsistency has tangible implications for the market, as it artificially favors a securitization execution relative to a portfolio execution. The failure to allow advances against eNotes also inhibits the transition to digital mortgages, as lenders often cannot afford bifurcated processes and therefore continue the use of inefficient and error-prone paper processing."

MBA said FHFA should clarify that eNotes represent an acceptable form of documentation for the purposes of FHLB advances.

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