MBA Letters Address GSE Capital Requirements; Single Security; CRA Reforms

Mike Sorohan msorohan@mba.org

November 20, 2018

The Mortgage Bankers, in a series of letters to federal agencies, offered recommendations to the Federal Housing Finance Agency on its proposed capital requirements for the government-sponsored enterprises (Fannie Mae and Freddie Mac); the FHFA proposed rule on the GSEs' Uniform Mortgage-Backed Security; and the Office of the Comptroller of the Currency's proposed rule to revamp the Community Reinvestment Act.

GSE Capital Requirements
The FHFA proposed rule would revise its capital requirements for Fannie Mae and Freddie Mac. Though these requirements would remain suspended while the GSEs are in conservatorship, they would nonetheless guide GSE business decisions during this period. The requirements would also represent the starting point for any future capital requirements for secondary market guarantors following more comprehensive GSE reform.

While MBA commended the basic framework of the proposal, which consists of both risk-based and leverage-based capital requirements, as well as regular stress testing, it also expressed concern with the pro-cyclicality of the proposed risk-based requirements. MBA noted use of mark-to-market loan-to-value ratios as currently designed would allow guarantors to release capital during stronger markets, only to then require larger capital buffers in the midst of a downturn.

"This procyclicality increases the likelihood that guarantors will be forced to raise additional capital at precisely the time they are least able to do so, triggering regulatory actions that would exacerbate negative market conditions," MBA said. "Instead, FHFA should establish a stable risk-based capital requirement that more accurately reflects the financial health of the guarantors through the credit cycle."

MBA also expressed concern with the varying treatment applied to different credit risk transfer structures, which could have differential impacts on the multifamily business lines of the Enterprises or other future guarantors. MBA noted in their current forms, the two Enterprises' multifamily businesses largely rely on distinct CRT executions.

"These unique approaches have provided important benefits to the secondary mortgage market, including the ability to attract more diverse sources of private capital," MBA said. "FHFA should ensure that the proposed rule does not systematically favor one execution over another, particularly where credit risk protection is substantially similar across executions."

MBA made clear its support of FHFA's intention to continue the suspension of the Enterprises' capital requirements during conservatorship, even once a final rule is adopted. "The financial backing currently provided to the Enterprises by the U.S. Treasury extends well beyond what would be needed in a severe recession, negating the short-term need for capital raises," the letter said. "More importantly, the structural weaknesses of the Enterprises that contributed to the 2008 financial crisis must be addressed before the Enterprises are permitted to take any steps towards an exit from conservatorship. Unless the necessary reforms are put into place, the Enterprises (or future guarantors) will not be able to meet the obligations that underpin the very reasons they were created."

Uniform Mortgage-Backed Security
The second MBA letter addresses a FHFA proposed rule promoting market adoption of its Uniform Mortgage-Backed Security, commonly known as the Single Security (https://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Securitization-Infrastructure.aspx). The Single Security is scheduled to go into effect June 3, 2019.

MBA said it supports development of both the UMBS and the Common Securitization Platform (a joint venture of Fannie Mae and Freddie Mac to administer the UMBS), "which together will represent a vastly improved single-family secondary mortgage market infrastructure. A formal rulemaking to codify processes and procedures for substantially aligned cash flows between issuers should bring greater certainty to market participants and stimulate increased investor demand, which should in turn generate significant benefits for borrowers and taxpayers."

"Development of the [Uniform MBS] and the Common Securitization Platform...will represent a vastly improved single-family secondary mortgage market infrastructure," MBA said.

MBA noted the Single Security--a longtime objective of MBA in its landmark 2017 white paper, GSE Reform: Creating a Sustainable, More Vibrant Secondary Mortgage Market (https://www.mba.org/issues/gse-reform)--should increase the tradeable supply of securities with a single market, resulting in "enhanced liquidity and better execution that drives down the yields demanded by investors, which would then flow through to borrowers in the form of lower average mortgage interest rates."

The letter also notes MBA's belief in the importance of "robust competition" among guarantors in the secondary market, noting however, competition based on the liquidity of securities that are otherwise substantially aligned across collateral type, credit risk, disclosures and other relevant features does not benefit investors, lenders or borrowers. "FHFA is correct to focus competition between the Enterprises on factors such as product offerings, technology and customer service," MBA said. "These are the areas in which competition leads to innovation or better execution, which then produces more efficient markets and lower costs for borrowers. Simply put, the liquidity of their securities should not be a basis for competition between the Enterprises, and there is no compelling reason for Fannie Mae and Freddie Mac TBA-eligible securities to trade in separate markets."

Community Reinvestment Act Reform
The third letter addresses the Office of the Comptroller of Currency's proposal on Reforming the Community Reinvestment Act Regulatory Framework. The advance notice of proposed rulemaking seeks feedback from stakeholders to help determine how banks can more effectively serve the convenience and needs of their communities by (1) encouraging more lending, investment, and activity where it is needed most; (2) evaluating CRA activities more consistently; and (3) providing greater clarity regarding CRA-qualifying activities.

MBA said it supports efforts to reform the CRA regulatory framework. MBA specifically requested in the letter that the reformed regulations address the following MBA concerns:

--Compliance transparency and certainty throughout the CRA evaluation process;

--Lack of flexibility in identifying assessment areas; and

--Limited range of activities that can receive CRA credit.

Further, MBA requested that the OCC allow for definitions of assessment areas to reflect the more modern ways in which consumers engage with banks (including online banking); specify a broad menu of activities for which banks are eligible to receive CRA credit (including commercial and multifamily lending); and also clarify the standards that examiners will apply when assessing CRA activities.

"A central goal of reforming or modernizing these processes should be to improve the ability of banks to meet the needs of their communities under the CRA," MBA said. "At the same time, any changes to the existing framework should ensure that the rules and regulations governing the processes are not unduly onerous, burdensome or confusing--resulting in non-effective or non-functional rules that make it difficult for banks to comply and difficult for regulators to implement."

MBA said a reformed regulatory framework should largely focus on improved compliance processes for banks, with major components addressing certainty in the administration of the rules by regulators and greater flexibility in the rules governing the delivery of services to the community.

"These components--compliance certainty and flexibility in the delivery of services--should be developed in a manner that encourages, and in fact facilitates, innovation by banks, as such innovation would certainly inure to the benefit of the communities they serve," MBA said. "Simply put, a reformed regulatory framework that incorporates appropriate process improvements can and should lead to better outcomes for the communities that the CRA was designed to serve."

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