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Secrets of Federal Reserve Doomsday Book Leaking During Slow-Moving Trial

Posted on September 13, 2018 by Safeguard

On October 13, The Wall Street Journal published an article titled Inside the Fed’s ‘Doomsday Book’.

Inside the Fed’s ‘Doomsday Book’

The Federal Reserve’s secretive “Doomsday Book” is leaking out bits at a time during a slow-moving trial in a tiny Washington courtroom.

The “Doomsday Book” is a compendium of legal opinions, in some cases stretching back decades, that explore the legal limits of the Federal Reserve in the event of a financial crisis. According to testimony provided by former New York Fed President Timothy Geithner, it is kept in various forms at the central bank’ fortress-like building there.

The Fed is fighting hard to keep the “Doomsday Book” under court seal so it can’t be released to the public, but parts of it are trickling out in testimony in a trial related to the government bailout of American International Group AIG +0.52% Inc.

There are at least three versions of the book. One was published on June 19, 2006, another in 2012 and a third in 2014.

The book contains a summary, between 1 and 2 inches thick, containing references to a number of different legal opinions. Mr. Geithner had kept his copy in his office, he said during three days of testimony.

“It’s kind of a big, fat binder,” he said. He said “we did occasionally go back and consult it as things were eroding around us. … It was a reference material that described precedent and authority.”

The book is considered “evidence” in a trial brought by AIG shareholders who are suing the U.S. government over the 2008 bailout. David Boies, who is representing plaintiffs in the case, has obtained the three versions of the book and said during trial that it contains “forms, legal memos, and other papers, sometimes in paper form and sometimes on a CD-ROM.”

Mr. Boies read from the book’s first page: “The ‘Doomsday Book’ is a collection of emergency documentation and memoranda compiled by the Legal Department of the Federal Reserve Bank of New York.”

He continued: “It is maintained in three forms: a complete paper version (copies kept in the Law Library, Records, and EROC),

CD-ROM and paper introductory section (distributed widely through the Legal Department) and on the Legal server (in the ‘LEGALDOCS’ library; ‘Doomsday Book Materials’ folder.)”

Page 53 of the book refers to a legal memorandum written by a former Fed general counsel Howard Hackley.

“The Doomsday Book says, with respect to the Hackley memorandum, ‘This is probably the most important historical document in the collection: a piece of original legal scholarship” that “is an extensive legal history of Federal Reserve lending activities.”

He offered a bit more: “The legal analysis is excellent and thorough and where necessary imaginative. The policy analysis reflects conventional early 1970s Federal Reserve public statements, and is generally less useful than the legal analysis.”

Meanwhile, Mr. Boies said page 36 of the 2006 version of the Doomsday Book contains a legal opinion written by former Fed general counsel Virgil Mattingly that “expresses an informal opinion… that Federal Reserve Banks do not have the power to make nonrecourse loans.”

The “Doomsday Book” of course contains much more, which is one reason why the Fed is fighting to keep it secret. The book also includes a section determining whether the Fed can loan money to cities and towns during a financial crisis.

What’s the Fed’s opinion on this?

We’ll have to find out on Doomsday.

Please click here to read the article online.

About Safeguard
Safeguard Properties is the largest mortgage field services company in the U.S. Founded in 1990 by Robert Klein and based in Valley View, Ohio, the company inspects and maintains defaulted and foreclosed properties for mortgage servicers, lenders, and other financial institutions. Safeguard employs approximately 1,700 people, in addition to a network of thousands of contractors nationally.
Website: www.safeguardproperties.com.

Possible Solution to End GSE Conservatorship is within FHFA Act

Posted on September 13, 2018 by Safeguard

On October 9, American Banker released an article titled If Congress Won’t End GSE Conservatorship Soon, FHFA Can.

If Congress Won’t End GSE Conservatorship Soon, FHFA Can

Last week, a D.C. District Court Judge struck down a lawsuit brought by shareholders in Fannie Mae and Freddie Mac who had been seeking to stop the government from taking the profits from the two agencies. The suit will be appealed, but setting aside the legal disputes for a moment, the U.S. government still has a big issue to confront: what to do about the two government-sponsored enterprises.

Congressional inaction has effectively forestalled any serious plan for bringing Fannie and Freddie out of conservatorship. The sheer complexity of GSE reform, coupled with a nearly unprecedented schism between political parties, explains why comprehensive change is, for the time being, elusive at best.

The situation is untenable. Under the current provisions of the agreements swapping preferred stock in the agencies for a Treasury backstop against credit losses, taxpayers effectively remain on the hook for future losses associated with outstanding mortgage-backed securities guaranteed by the agencies — which total approximately $6.5 trillion — until some resolution of Fannie and Freddie is completed.

Meanwhile, the U.S. housing finance system languishes in a form of suspended animation that poses considerable uncertainty to private investors and potential homebuyers alike. The right outcome for GSE reform, namely comprehensive legislation addressing Fannie Mae and Freddie Mac, is unlikely to occur for the reasons cited above.

However, a solution is feasible that would bring private capital back to housing markets, prevent future taxpayer bailouts of the agencies in all but extreme scenarios, and address the issues that precipitated the demise of the GSEs.

This solution is already possible within the Housing and Economic Recovery Act of 2008 by granting the Federal Housing Finance Agency authority to bring the housing GSEs out of conservatorship. It is important to keep in mind that conservatorship was not meant to be a long-term solution for the GSEs and the same broad powers that allowed the federal government to place the agencies into conservatorship also allow it to reconstitute both companies.

The principal factors directly attributable to the GSEs entering conservatorship -weak regulatory oversight, low capital requirements, unchecked retained portfolio growth, and poor underwriting standards — have effectively been addressed with one exception (the capital part). And with stronger regulatory oversight in place in the form of the FHFA, establishment of strong capital requirements would also be feasible and a prerequisite to any post-conservatorship environment for the GSEs. Had these deficiencies been addressed earlier, Fannie and Freddie would have survived the mortgage crisis battered but intact.

As many, including Congresswoman Maxine Waters, have noted, the conservatorship — now in its sixth year — was never meant to be permanent; nor was the government’s 100% profit sweep meant to be perpetual. With the agencies in conservatorship, the federal government has effectively engineered a redistribution of capital out of housing and into the budgetary ether to help cover costs associated with the payroll tax cut extension through higher guarantee fees and by siphoning off profits from the companies well in excess of the costs incurred by the government to cover GSE credit losses.

To date the agencies have paid back either through dividend or profit sweeps a total of $218.7 billion against draws of $189.4 billion, putting the taxpayer back in the black. That’s without taking into account the value of the preferred shares or warrants received by Treasury that give the holder the option to purchase up to nearly 80% of the common stock of both companies. Conservative estimates on the preferred share and warrants provide another $200 billion or more to the taxpayer.

One approach to accelerating a recapitalization of the GSEs would be to cancel the Treasury’s senior preferred stock by declaring it “paid back,” re-characterizing past payments of the profit sweep (minus the 10% dividend sweep) as a paydown of principal. The value from that cancellation would flow up through to the remaining common stock, benefitting the Treasury as owner of 80% of the common stock through the warrants that it still would hold.

Taking the step to end the conservatorship and recapitalize Fannie and Freddie is in the best interest of the taxpayers by monetizing a substantial profit from their investment in the GSEs over the last six years. And with changes already in place, coupled with strict risk-based capital rules, this step would virtually eliminate future taxpayer exposure to housing crises.

Please click here to view the article online.

MHA Supplemental Directive 14-03 Making Home Affordable Program-Administrative Clarifications

Posted on September 13, 2018 by Safeguard

On September 30, Making Home Affordable (MHA) issued an update titled Supplemental Directive 14-03: Making Home Affordable Program-Administrative Clarifications.

MHA UPDATE

Supplemental Directive (SD) 14-03: Making Home Affordable Program – Administrative Clarifications
Today, September 30, 2014, Supplemental Directive 14-03: Making Home Affordable Program – Administrative Clarifications was issued, providing updates and clarifications on the following topics as they relate to the Home Affordable Modification Progra (HAMP):

Consideration of HAMP Loans Prior to Loss of Good Standing
Evaluation of Borrowers with Interest Rate Step-Ups
Borrower Solicitation
Re-coding of Base NPV Model
MHA Outreach and Borrower Intake Project

This SD amends and supersedes the notated portions of the Handbook and, except as stated therein, is effective immediately.

This guidance does not apply to mortgage loans that are owned or guaranteed by Fannie Mae or Freddie Mac (each, a GSE), or insured or guaranteed by the Veterans Administration, the Department of Agriculture’s Rural Housing Service or the Federal Housing Administration.

Read SD 14-03 in its entirety for more information.

Questions?
Email the HAMP Solution Center or call 1-866-939-4469.

Please click here to view the update online.

MHA HAMP Reporting Update Updated Base NPV Model Documentation v5.0 Available

Posted on September 13, 2018September 13, 2018 by Safeguard

On October 21, Making Home Affordable (MHA) released a HAMP Reporting Update, subtitled Updated Base NPV Model Documentation v5.0 Available.

MHA HAMP Reporting Update

Updated Base NPV Model Documentation v5.0 Available

The Base NPV Model Documentation v5.0 is now available for the Home Affordable Modification Program® (HAMP). This revision of the documentation addresses following:

Expanded eligibility for HAMP Tier 2 as detailed in Supplemental Directive (SD) 14-03.
Clarification of process for evaluating loans with rate step-ups for HAMP Tier 2 as detailed in SD 14-03.

Servicers can access the Base NPV Model Documentation v5.0 in both the public and secure (login required) sections section of HMPadmin.com under the heading Base NPV Model Tools & Documents.

Questions?
Email the HAMP Solution Center or call 1-866-939-4469.

Please click here to view the online update.

MHA HAMP Reporting Update February 2015 Release Communications Plan Posted

Posted on September 13, 2018September 13, 2018 by Safeguard

On October 9, Making Home Affordable (MHA) released a HAMP Reporting Update, subtitled February Release Communications Plan Posted.

HAMP REPORTING UPDATE

February 2015 Release Communications Plan Posted

The communications plan for the February 2015 Release has been updated and posted on the open and secure sections of HMPadmin.com. This plan provides a high-level overview of the upcoming release with key milestones identified.

Please review the February 2015 Release Communications Plan for more details. This plan can be found in the Release Notes tab under the Loan Reporting Documents section on HMPadmin.com.

Questions?
Email the HAMP Solution center or call 1-866-939-4469; to reach Black Knight, select option 1, then option 5.

Please click here to view the online update.

About Safeguard
Safeguard Properties is the largest mortgage field services company in the U.S. Founded in 1990 by Robert Klein and based in Valley View, Ohio, the company inspects and maintains defaulted and foreclosed properties for mortgage servicers, lenders, and other financial institutions. Safeguard employs approximately 1,700 people, in addition to a network of thousands of contractors nationally.
Website: www.safeguardproperties.com.

Joint Agency Rule on Risk Retention Submitted for Adoption

Posted on September 13, 2018October 29, 2018 by Safeguard

On October 21, HousingWire released an article titled Joint agency rule on risk retention goes to Fed, SEC for final adoption.

Joint agency rule on risk retention goes to Fed, SEC for final adoption

The Federal Deposit Insurance Corporation on Tuesday issued the final version of the rule that would require banks to retain at least 5% of the risk on their books when securitizing loans.

Industry watchers and regulators believe that making banks and nonbanks keep skin in the game will make them more careful about lending standards.

The rule contains an exemption for Qualified Mortgages similar to when the rule was proposed in 2013, along with a requirement for a periodic review of the definition and parameters for QM.

“Finalizing this rule represents a major step forward to providing greater certainty to the housing finance market and paves the way for increased participation by the private sector,” Federal Housing Finance Agency Director Melvin Watt said Tuesday morning.

“Aligning the Qualified Residential Mortgage standard with the existing Qualified Mortgage definition also means more clarity for lenders and encourages safe and sound lending to creditworthy borrowers,” Watt continued.

“Lenders have wanted and needed to know what the new rules of the road are and this rule defines them,” he said.

The rule is jointly issued by six regulatory agencies.

“We are largely pleased with the Qualified Residential Mortgage final rule released today, which will help ensure the largest number of creditworthy borrowers are able to access safe, quality loan products at competitive prices,” Frank Keating, president and CEO of the American Bankers Association.

“By law, the QRM definition cannot cover more loans than the existing Qualified Mortgage rule, but it might have been more restrictive,” he said.

“Gratefully, the QRM definition aligns with QM, an approach ABA has strongly advocated. This will encourage lenders to continue offering carefully underwritten QM loans, and avoid placing further hurdles before qualified borrowers, allowing them to achieve the American dream of homeownership,” Keating said.

He added that the rule, required by Dodd-Frank to ensure that loans sold into the secondary market are properly underwritten, is a goal which the QM rule also helps to ensure.

“It is appropriate and good policy to align the two,” Keating said.

“CUNA has advocated strongly for the important step of aligning the Qualified Residential Mortgage with the existing Qualified Mortgage definition. Doing so encourages lenders to work with creditworthy borrowers to make home loans that will continue to drive the country and our economy forward,” said Credit Union National Association’s Mary Dunn, SVP & deputy general counsel. “The Federal Housing Finance Agency, the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency finalized the rule this morning. We look forward to the Federal Reserve, Securities and Exchange Commission and Department of Housing and Urban Development continuing to finalize the rule tomorrow.”

The Structured Finance Industry Group likewise offered its take on the rule.

“SFIG thanks the FDIC for finalizing credit risk retention rules, and we look forward to approval by the remainder of the Joint Regulators,” stated Richard Johns, SFIG Executive Director. “SFIG believes that securitization is an essential source of core funding for the real economy and that new rules must be strong enough to achieve their intended actions without undermining the viability of any specific market. If carefully designed, credit risk retention can promote behaviors that increase market stability by incentivizing securitizers to monitor and ensure the quality of assets underlying securitization transactions. If taken too far, however, retention could render large portions of the securitization market uneconomic, leading to the reduction of available credit and/or increases the borrowing costs for households and businesses. SFIG and its membership will review the final rules under these dual lenses.”

The final stage before adoption of the rule, which has been in the works since 2011, will be for it to be approved by the Federal Reserve and the Securities and Exchange Commission on Wednesday.

The practice of banks selling the risk in their loan and mortgage portfolios to investors is considered a major element in the financial crisis and housing crash.

Please click here to view the article online.

HUD Program Potentially a Big Step on the Road to Housing Market Recovery

Posted on September 13, 2018September 13, 2018 by Safeguard

On October 9, The Hill released an article titled Finding Common Ground on HUD’s Distressed Asset Sales Program.

Finding common ground on HUD’s Distressed Asset Sales Program

When the U.S. housing bubble burst in 2007 and 2008, millions of Americans lost their homes to foreclosure. Since that time, the Obama administration has gone to great lengths to get the economy—specifically the housing market—back on track. And we’re doing well: As The Hill reported last week, foreclosures in August 2014 “fell on a yearly basis to their lowest level since 2007.”

But working our way back to prosperity has not been without bumps, bruises, and challenges. One effort managed by HUD—the Distressed Asset Sales Program (DASP)—is something my colleagues and I at the Federal Housing Administration have viewed as a significant step on the road to full recovery.

For those who aren’t familiar, DASP allows pools of mortgages headed for foreclosure to be sold to qualified bidders while encouraging those bidders to help bring the loan out of default. In many cases, it’s a less expensive alternative to foreclosure and sale as REO (“real estate owned”).
In fact, DASP is reducing total claims to FHA and it’s allowing us to avoid scenarios where we end up with thousands of empty American homes that decrease property values and harm communities.

DASP is providing an opportunity for many homeowners who are struggling to make their mortgage payments. Our data indicates that 11 percent of homeowners who are part of DASP received loan modifications—and close to another 50 percent are still in default servicing. This means that, without a doubt, the program is providing those families with an additional option that can help keep them in their homes and in their communities. In other words, they’re getting another chance. DASP is doing this all while enabling FHA to continue to advance its mission to create homeownership opportunities for those who are ready.

But that doesn’t mean we can’t improve the program.

In recent weeks, we’ve heard from a number of groups about DASP. Many—if not most—are supportive. But some have criticized, going so far as to call for the program’s suspension. Of the information being shared about DASP, however, some of it doesn’t fully reflect the nature of the program. And some of it is just plain wrong. But in our effort to improve the DASP program, we’ve taken seriously some of the recommendations and we’re in the process of implementing several changes.

So I want to take a moment to explain exactly what those changes are and how we plan to strengthen DASP in the future.

First, we’re expanding our Direct Sale program. To that end, we’re actively engaging with local governments that are interested in a direct sale of notes as an alternative to the notes sales or the REO process.

Second, we’re enhancing our loss mitigation quality control processes. In addition to the required self-reporting done by Servicers of their mandatory loss mitigation process as part of the FHA program, we’ve introduced an in-house review of each loan to determine whether the Servicer of that loan has truly exhausted all loss mitigation options.

Third, we’re doing a better job at listening through more concerted stakeholder engagement. At FHA, we’ve met with a variety of for-profit, non-profit, and governmental stakeholders who have expressed the desire for this type of program in the marketplace. Those parties have also provided their concerns and recommendations to improve the program, many of which have been taken and applied in recent sales. We’ll continue to engage with these stakeholders in an ongoing dialogue and, where appropriate, apply that feedback in future sales.

Fourth, we’ve heard non-profit groups loud and clear and we’re going to do a better job at non-profit outreach. FHA has expanded its effort to contact non-profits who may want to participate in the DASP program. We’re also exploring options for providing technical assistance and seminars on the note sale process to the non-profit community.

In addition to these program management changes, specifically, we’ve also modified how FHA will execute its November “neighborhood stabilization outcome,” or, NSO sale. In this case, we’re expanding the number of available loan pools from six or seven to 13. This means a larger portion of the loans slated for sale this fall will be part of the NSO sale, providing more opportunity to stabilize neighborhoods. We’re also creating what we call “micro-pools”—small and mid-sized, geographically concentrated pools aimed at attracting a more diverse range of buyers.

Finally, we’re also making a significant change with respect to the advance notice given of the NSO sale date. Historically we’ve announced sales four weeks prior to the sale date. But we’ve received a good deal of feedback in recent months from non-profit organizations who’ve said that more time for due diligence leading up to a sale would be helpful in assessing their participation. Therefore, we announced our November sale in early September, allowing a total of nine weeks for due diligence.

In sum, we believe these changes will improve the program. But we’re not letting up. We have a responsibility to get this right—and through listening to our many stakeholders, we’ll continue to seek ways to improve DASP. And that’ll bring us one step closer to the full housing recovery we all want to see.

Please click here to view the article online.

HUD Looks to Ease Lender Risk and Expand Accessible Credit for Buyers in Housing Market

Posted on September 13, 2018September 13, 2018 by Safeguard

On October 21, DS News released an article titled Castro Outlines HUD’s ‘Blueprint for Access’.

Castro Outlines HUD’s ‘Blueprint for Access’

U.S. Department of Housing and Urban Development (HUD) Secretary Julián Castro announced in a speech on Monday the points of HUD’s “Blueprint for Access” meant to ease the risk of lenders while expanding credit.

“It’s in our entire nation’s interest to help more responsible Americans succeed in the housing market by expanding access to credit,” Castro said. “Some believe that a few years ago, it was too easy to get a home loan. Now, it’s too hard. In fact, according to the Urban Institute, the housing market is missing out on 1.2 million loans every year because credit is so tight. And even Ben Bernanke recently said that he’s having trouble refinancing his mortgage. If the former Fed Chair is having trouble, imagine the frustration of average folks. The pendulum has swung too far in the other direction. There’s been a vacuum in the market and it needs to be filled. Thankfully, we’re already starting to see movement.”

Castro termed the 1.2 million loans being missed as a “market opportunity” and encouraged lenders who have not done so to expand their credit, asking them if they wanted to “leave business on the table.”

“All parties would benefit if you took action and expanded your reach. And I urge you to do so,” Castro said. “But, I’m also aware that government must take action by shaping an environment where good lenders and good borrowers can work together without reservation. This means creating more certainty for you, which is a top priority at HUD. In the wake of the crisis, we’ve seen a lot of frustration from lenders when it comes to their FHA business.”

Castro then introduced the Blueprint for Access, which includes three key points. First, he said, HUD is overhauling its “Single Family Housing Policy Handbook,” and the first major section of the revised version (which covers loan originations) has already been published with changes made based on feedback received from lenders. Castro said HUD is accepting feedback for additional sections of the handbook and he expects it to be largely completed by next year.

“This is an important accomplishment and should give you confidence that you understand FHA’s policies and its expectations for compliance,” Castro said.

The second main point of the Blueprint for Access is the “Supplemental Performance Metric,” which is intended to give a more complete portrayal of a lender’s portfolio performance. The current metric measures only a lender’s default performance against that of its peers in a local market, which “doesn’t paint a complete picture,” Castro said.

“The Supplemental Performance Metric addresses this by focusing on a lender’s performance compared to those also doing business in the credit score range that FHA is targeting,” Castro said. “We’re finalizing this work and expect it to be available early next year. This will minimize the ‘Credit Watch Termination’ risk for lenders moving to support credit-worthy borrowers with lower credit scores when their peers do not.”

The third key point of the Blueprint for Access is the “Loan Defect Taxonomy,” which Castro said is currently in draft form.

“This is a new way of looking at loan defects and it’s going to be a critical tool for our partners,” Castro said. “FHA historically has used 99 different codes to describe defects in loans. The taxonomy will bring this down to nine distinct categories, and offer some new insight into the significance of the deficiency. This new approach will give lenders the information they need to clearly identify where their challenges are and allow them to make changes. It will allow FHA to monitor trends in deficiencies and determine if policies can be enhanced to help lenders avoid deficiencies.”

Castro told the lenders he believes the Blueprint for Access will “bolster your confidence so that you can originate more loans to credit-worthy borrowers in FHA’s credit box.”

Please click here to view the article online.

GAO-15-5 Troubled Asset Relief Program

Posted on September 13, 2018September 13, 2018 by Safeguard

On October 6, the U.S. Government Accountability Office (GAO) released GAO-15-5, a report subtitled Troubled Asset Relief Program: Treasury Could Better Analyze Data to Improve Oversight of Servicers’ Practices.

TROUBLED ASSET RELIEF PROGRAM:
Treasury Could Better Analyze Data to Improve Oversight of Servicers’ Practices
GAO-15-5

What GAO Found

Through June 2014, the U.S. Department of the Treasury (Treasury) had disbursed about one-third of the $38.5 billion in Troubled Asset Relief Program (TARP) funds allocated to housing programs. However, the number of new borrowers added to the Home Affordable Modification Program (HAMP), the key component of the Making Home Affordable (MHA) program, began to decline in late 2013 after remaining relatively steady since 2012. Treasury has taken steps to assist more homeowners and also to address upcoming interest rate increases for borrowers already in the program (after 5 years, interest rates on modified loans may gradually increase to the market rate at the time of the modification). For example, Treasury has extended the HAMP deadline for a third time to at least December 31, 2016, and required servicers to inform borrowers about upcoming interest rate changes.

Treasury monitors HAMP denial and redefault rates, but its evaluation of data to help explain the reasons for differences among servicers is limited. GAO’s analysis of HAMP data found wide variation among servicers in reasons for denials of trial modifications. Some of these variations may be due to differences in servicer practices that would not necessarily be identified by Treasury’s compliance review process or analysis for reporting errors. GAO also identified wide variations in the probability of redefault even after controlling for differences in servicers’ loan, borrower, and property characteristics, using available data (see figure). Federal internal control standards state that analyzing relationships among data helps inform control and performance monitoring activities. Without more fully evaluating servicer data, Treasury may miss opportunities to identify and address servicer weaknesses and assist and retain as many borrowers as possible.

Finally, Treasury has implemented most of GAO’s past recommendations but has not fully implemented several that are intended to improve its oversight of the TARP-funded housing programs. For example, Treasury requires servicers to have controls in place for monitoring compliance with fair lending laws. But Treasury officials told us that they did not plan to assess these controls as GAO recommended because other federal agencies assess compliance with fair lending laws. Without such assessments, Treasury cannot determine whether servicers are complying with Treasury’s requirement. As stated previously, implementing this recommendation and others would improve Treasury’s oversight of TARP housing programs and help ensure that they assist and retain the greatest number of borrowers.

Why GAO Did This Study

Treasury introduced MHA in early 2009 and has allocated $38.5 billion in TARP funds to help struggling homeowners avoid potential foreclosure. The Emergency Economic Stabilization Act of 2008 requires GAO to report every 60 days on TARP activities. This 60-day report examines (1) the status of TARP-funded housing programs, (2) Treasury’s efforts to monitor and evaluate HAMP denial and redefault rates among servicers, and (3) the status of the implementation of GAO’s prior recommendations related to TARP-funded housing programs. To do this work, GAO reviewed program documentation, analyzed HAMP loan-level data, and interviewed knowledgeable Treasury officials.

What GAO Recommends

GAO recommends that Treasury conduct periodic evaluations to help explain differences among MHA servicers (1) in the reasons they gave for denying applications for HAMP trial modifications and (2) in HAMP loan modification redefault rates. Such evaluations would help inform compliance reviews of individual servicers and help identify any needed program policy changes. Treasury agreed to consider making changes to its analytical methods for evaluating data on denial and redefault rates among individual servicers.

For more information, contact Mathew Scirè at (202) 512-8678 or sciremj@gao.gov.

Please click here to view the report highlights in PDF.

Please click here to view the report in its entirety.

GAO-15-131 Housing Finance System

Posted on September 13, 2018September 13, 2018 by Safeguard

On October 7, the U.S. Government Accountability Office (GAO) released GAO-15-131, a report subtitled Housing Finance System: A Framework for Assessing Potential Changes.

Housing Finance System:
A Framework for Assessing Potential Changes
GAO-15-131

What GAO Found

Developments in the single-family housing finance market from 2000-2013 led to changes in the federal government’s role in the housing finance system and ultimately to a significant increase in that role. For example,

Before the 2007-2009 financial crisis, the market share of nonprime mortgages—loans often made to borrowers with high-risk characteristics and funded by mortgage backed securities (MBS) issued by private institutions without a federal guarantee (private-label MBS)—grew but fell dramatically during the crisis.
As this market segment grew the share of new mortgage originations (refinances and purchase loans) insured by federal entities—the Federal Housing Administration and the Departments of Veterans Affairs and Agriculture—fell from 11 percent in 2000 to less than 3 percent of the value of new originations in 2006 but, with the onset of the crisis, the market share of these mortgages rose as high as 25 percent before declining to 20 percent of the market in 2013.
The market share of new mortgages backing MBS guaranteed by Fannie Mae and Freddie Mac (the enterprises) fell from 36 percent in 2000 to 27 percent in 2006 but stood at 61 percent in 2013.
In 2008, when the enterprises’ weakened financial condition led to their being placed into conservatorship, the federal government’s support for them became explicit .
In 2013 the federal government was providing support either directly or indirectly for 81 percent of the value of all new mortgages. In addition, during the crisis, the Federal Reserve System and the Department of the Treasury began purchasing MBS issued by the enterprises. The Federal Reserve System began reducing these purchases in January 2014, and Treasury completed the sale of its MBS investments in fiscal year 2012.

Developments in mortgage markets since 2000 have challenged the housing finance system and revealed or led to weaknesses in that system including misaligned incentives, an overall lack of reliable information or transparency, and excessive risk taking. For example

Originators’ and private-label securitizers’ incentives were not aligned with those of borrowers and investors, because originators and private-label securitizers generally did not retain credit risk.
Some borrowers lacked reliable and relevant information to adequately understand the risks of mortgage products because originators were not required to share certain information.
A loosening of underwriting standards prior to the financial crisis likely led to excessive risk taking by borrowers.

Limitations in federal oversight of housing market participants exacerbated these weaknesses, though Congress has taken some steps designed to address these limitations. The Federal Housing Finance Agency and Bureau of Consumer Financial Protection (known as the Consumer Financial Protection Bureau) were created to address regulatory gaps, including oversight of the enterprises and consumer protection. These agencies have taken steps designed to oversee the enterprises, protect consumers, and provide better information to the public. However, representatives of market participants said that they faced uncertainties because some regulations had not been implemented, and Congress was considering further changes to the system.

In light of the substantial increase in federal support of the single-family housing finance system and weaknesses revealed during and after the financial crisis, some experts believe the U.S. housing finance system warrants reform. In addition, GAO has identified the federal role in housing finance as a high risk area. GAO is providing a framework to help assess proposed changes in the housing finance system. This framework is comprised of nine elements (see table), and certain characteristics—transparency, accountability, aligned incentives, and efficiency and effectiveness—need to be addressed throughout the elements. Applying the elements of this framework should help reveal the relative strengths and weaknesses of any proposal for change and identify what are likely to be significant trade-offs among competing goals and policies. Similarly, the framework could be used to craft new proposals. Finally, the framework should help policymakers understand the risks associated with transitioning to a new housing finance system.

Why GAO Did This Study

Housing finance played a major role in the 2007-2009 financial crisis, and the housing sector continues to show considerable strains. The federal government’s role in the single-family housing finance system has also grown substantially. As a result, policymakers and others have made proposals to change the system. To help policymakers assess various proposals and consider ways to make it more effective and efficient, this report (1) describes market developments since 2000 that have led to changes in the federal government’s role in the single-family housing finance system; (2) analyzes whether and how these market developments have challenged the housing finance system; and (3) presents an evaluation framework for assessing potential changes to the system.

GAO reviewed literature on housing finance and housing market developments as well as prior GAO reports presenting frameworks for reform in the financial sector and criteria for improving government performance. GAO also met with officials from a number of federal agencies. Based on the literature review and interviews, GAO developed a draft framework that it shared with seven discussion groups composed of government officials, experts from academia and research organizations, and interested parties such as consumer advocates and industry representatives. The discussants provided input on market developments and the framework.

For more information, contact Matt Scirè at (202) 512-8678 or sciremj@gao.gov.

Please click here to view the report highlights in PDF.

Please click here to view the report in its entirety.