In sports, a scorecard helps us tally results by keeping track of hits, baskets or goals. Likewise, FHFA uses annual Scorecards as a way to communicate our conservatorship priorities and expectations to Fannie Mae and Freddie Mac (the Enterprises) and to make these expectations known to the public as well. We recently published the 2016 Scorecard outlining performance measures for the Enterprises to meet next year. The key priorities of Maintain, Reduce and Build will remain in effect, which align with our 2014 Conservatorship Strategic Plan. The 2016 Scorecard initiatives build on the substantial progress made in each of these areas in the past few years.
For example, the Maintain goal recognizes that a healthy housing finance market requires liquidity and access to credit for a wide variety of creditworthy borrowers, as well as sensible loss mitigation options for when borrowers fall on hard times. Under this goal, Fannie Mae and Freddie Mac have worked over the last few years to provide greater clarity and certainty for lenders about when and why they might be required to repurchase a mortgage they have sold to either Enterprise. This helps borrowers because we know that a lack of clarity in this area has caused some lenders to restrict lending to borrowers with lower credit scores or with less conventional financial situations.
In 2014, FHFA and the Enterprises brought clarity to the so-called "life-of-loan" exclusions, and lenders now have a firm sense of the circumstances under which they might be required to repurchase a loan they have sold to Fannie Mae or Freddie Mac. In 2015, the Enterprises, for the first time, published guidance that defines the severity levels for loan origination defects and established a process for lenders to correct or remedy those defects to the extent practicable. For 2016, the Maintain section of the Scorecard reflects the steps needed to finalize these "rep and warrant" improvements, including completing work to create an independent dispute resolution process.
On loss mitigation, the Maintain section of the 2016 Scorecard again builds on the progress made through 2015. Earlier this year, FHFA announced enhanced guidelines for the sale of severely delinquent mortgages, referred to as non-performing loans (NPLs), by the Enterprises. The enhanced guidelines support both reducing losses for Fannie Mae and Freddie Mac while also improving outcomes for borrowers and neighborhoods. For 2016, the Scorecard requires the Enterprises to submit plans for continued NPL sales. The Scorecard emphasizes that these plans should include ideas for offering additional small NPL pools and for strengthening nonprofit access and purchase opportunities.
The Reduce goal is focused on ways to bring private capital back into the housing finance system in order to reduce risk for taxpayers. Fannie Mae and Freddie Mac began engaging in these transactions in mid-2013 and expanded the dollar amount and type of transactions in 2014 and 2015. Earlier this year FHFA published an Overview of Fannie Mae and Freddie Mac Credit Risk Transfer Transactions detailing the development of this market. As noted in the 2016 Scorecard, single-family credit risk transfer transactions have evolved into a core business practice for Fannie Mae and Freddie Mac. For the coming year, FHFA expects the Enterprises to continue their efforts to transfer credit risk on targeted categories of mortgage loans.
Under the Build goal, FHFA, Fannie Mae and Freddie Mac remain focused on developing a new infrastructure for the Enterprises' securitization functions. This includes developing a Common Securitization Platform (CSP) that will support single-family mortgage securitization activities, and developing a single mortgage-backed security that the Enterprises could issue to finance fixed-rate, single-family mortgages. Both projects remain multiyear initiatives but significant progress has already been made. For more background information on these initiatives, FHFA issued an Update on the Structure of the Single Security in May 2015, followed by an Update on the Common Securitization Platform in September 2015.
Building on this progress, the 2016 Scorecard communicates two timelines for implementing the CSP and the Single Security. First, FHFA expects the Enterprises to implement the CSP for existing Freddie Mac single-class securities in 2016. Second, FHFA expects the Enterprises to then implement the Single Security for both Enterprises in 2018.
As was the case in 2015, the 2016 Scorecard also applies to Common Securitization Solutions (CSS), the joint venture owned by Fannie Mae and Freddie Mac, which houses the CSP. Much has been accomplished in recent years to establish CSS, including developing operating agreements and a governing structure, hiring a CEO, and creating an organizational structure that supports their initial operations. This initial phase involves building a large software application, the operational capacity to run a business that will use the software to meet the needs of the Enterprises, and a technical infrastructure that supports the application of the company's business processes. Among other things, the 2016 Scorecard sets forth that CSS will continue along this path and implement key corporate processes that will support CSS's operations as a stand-alone company.
In sports, scorecards help us follow the action and the same is true in the important work of housing finance. FHFA knows that progress has been made but that more work remains to be done. The 2016 Scorecard will serve as a tally for Fannie Mae and Freddie Mac as we continue to oversee their conservatorships and ensure that they operate in a safe and sound way while also providing liquidity and efficiency to our nation's housing finance market.
Tagged: Conservatorship; Scorecard
By: Bob Ryan,
Acting Deputy Director for the Division of Conservatorship
and Sandra Thompson,
Deputy Director for the Division of Housing Mission and Goals