MReport Jan 2019

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TH E M R EP O RT | 57 O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST GOVERNMENT Think Tank Weighs In AEI recently responded to FHFA's capital requirements proposal. I n its Performance & Ac- countability Report for the financial year 2018, the Federal Housing Finance Agency (FHFA) mentioned its proposed regulation on capital requirements for Fannie Mae and Freddie Mac. Following this, the American Enterprise Institute (AEI) published its response to the proposal. The FHFA first proposed the "new framework for risk-based capital requirements and a revised minimum leverage capital require- ment for the Enterprises." The proposed rule offers two scenarios, one in which the GSEs would maintain capital equal- ing 2.5 percent of total assets and off-balance sheet guarantees. The second would require the GSEs to hold capital equal to 1.5 percent of trust assets and 4 percent of non- trust assets. The AEI stated in a letter to the FHFA last week that the pro- posals were insufficient to support potential risk at the GSEs and laid out detailed alternatives to the FHFA's proposal. "Specifically, its binding risk- based rules would not require enough capital to address another housing crisis of comparable mag- nitude to the most recent one, and its minimum leverage ratios would not be consistent with re- quirements for global systemically important banks (G-SIBs) given the de facto status of the GSEs as systemically important financial institutions (SIFIs)," according to the AEI. On the other hand, the AEI asserted its recommendations "would result in the additional risk-based capital of more than 200 basis points relative to FHFA's proposal and a minimum leverage ratio of 4 percent," according to the letter. Operational risks are another concern for the AEI, which stated that the FHFA's "add-on to cover operation risk is a scant eight bps." Continuing, the AEI stated, "For the two GSEs together, that amounts to $3.7 billion for 2017. To give a little bit of context to that, consider that 12 years ago, Fannie Mae restated its earnings down- ward by $6.3 billion because of accounting errors." The AEI also asserted that "The proposed minimum leverage ratios would not produce results comparable to the largest banks for comparable assets." While the FHFA suggested the GSEs are less risky than banks and should thus have lower minimum lever- age, the AEI suggested it is more relevant to compare the GSEs to global systemically important banks (G-SIBs) in the United States because the GSEs have been deemed systemically impor- tant. For G-SIBs, the minimum leverage is 6 percent. The AEI recommends increasing risk-based capital standards to ac- count by about 200 basis points in total to address going-concern risk, operational risk, model risk, and to address counter-cyclical risks. The AEI recommends increas- ing the minimum leverage capital ratio from the proposed 2.5 per- cent or less to at least 4 percent and proposes limiting the use of preferred stock to meet both risk-based and leverage capital requirements. independent third party provider (auction company) where permit- ted by jurisdiction to "conduct the foreclosure sale and market the property prior to such sale" to mean that a third party pro- vider is not permitted to provide marketing services in areas where foreclosure sales are conducted by state and local governments. This limits CWCOT to 23 states where third-party providers are permitted to "conduct" foreclo- sure sales. In contrast, Veteran Affairs (VA), Rural Development (RD), and government-sponsored enterprises (GSEs) authorize third-party providers to market properties in jurisdictions where foreclosure sales are conducted by state and local governments, thus increasing visibility and competi- tion and resulting in higher sales proceeds. Clarification of policy to allow third-party providers to offer marketing services in jurisdictions where state or local governments conduct the sale will not only result in greater lever- age of CWCOT and lower losses for FHA but will also expand CWCOT's reach to all the 50 states. Distressed Asset Comparables The first is making improve- ments in the use of distressed as- set comparables on appraisals for CWCOT properties. Currently, lenders using the CWCOT method must use an "As-Is" FHA appraisal to determine the Commissioner's Adjusted Fair Market Value (CAFMV). While the current protocols under CWCOT provide direction to lenders on conditioning the appraisal, they do not provide guidance permitting the use of distressed property comparables to ascertain value. More detailed guidance from HUD and the FHA to establish that distressed sales may be used as comparables for CWCOT appraisals when ap- propriate would better reflect the true market value of distressed assets, support a more accurate CAFMV and align CWCOT guidance with HUD's REO ap- praisal protocol. Reconsideration of Commissioner's Adjusted Fair Market Value The second important piece of guidance would be to ensure a more accurate CAFMV on the date of sale. While FHA's cur- rent guidance acknowledges that pre-acquisition appraisals may not accurately reflect property condition, it does not provide for a resolution. A more detailed clarification from the FHA such as allowing appraisers to make a new appraisal when there is a material change to the circumstances of the property (including but not limited to change in occupancy status or expiration of the original appraisal) that would affect the CAFMV will ensure a more accurate fair market value. More accurate CAFMVs promote increased third-party sales and by promoting increased competition for properties and ultimately benefit the MMI Fund. FHA is on sound footing and, under the leadership of Commissioner Montgomery, is modernizing its business practices. Issuing the above-described guid- ance would be another step in the right direction toward maximiz- ing recoveries through CWCOT, and the mortgage industry stands ready to work with all interested stakeholders to promote the health of the MMI Fund for the benefit of homeowners and taxpayers. Ed Delgado is President and CEO of the Five Star Institute, a leading mortgage banking association providing educa- tion and strategic services to the U.S. residential mortgage market. During his 25-year career, Delgado has held executive positions at Wells Fargo and Freddie Mac. While at Wells Fargo, Delgado played an integral role as a key representative to the U.S. Department of the Treasury, sup- porting the Bush and Obama administra- tions' efforts to develop mortgage solutions designed to prevent residential foreclo- sures in the U.S. Delgado was elected Chairman of the Office of the Comptroller of Currency Advisory Council, an inde- pendent working group, and is a current Board Member at Operation Homefront, a national 501(c)(3) nonprofit whose mis- sion is to provide valued programs and aid to U.S. military veterans.

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