MReport October 2019

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62 | TH E M R EP O RT SECONDARY MARKET THE LATEST 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 stress test results also revealed that comprehensive losses decreased in the stress test for 2019 compared to the one conducted in 2018. In Case of Adversity The FHFA recently released the stress test reports for Fannie Mae and Freddie Mac. T he provision for credit losses would be the largest contribut- ing factor to losses at Fannie Mae and Freddie Mac under severely adverse economic conditions. This was revealed in the results of a stress test con- ducted by The Federal Housing Finance Agency (FHFA) under the Dodd-Frank Act. According to the FHFA report, apart from provisions for credit losses, the global market shock impact on trading securities and available-for-sale securities would be the largest contributing factor for losses at the two government- sponsored enterprises (GSEs) under FHFA's conservatorship. The stress test results also revealed that comprehensive losses decreased in the stress test for 2019 compared to the one conducted in 2018. The decline, according to the FHFA, was "mostly driven by the decrease in provision for credit losses as a result of the less severe decline in home prices" included in the 2019 scenario and "the im- provement in the credit profile of the GSEs' books of business." The 2019 stress test scenario was based on a severe global recession accompanied by stressed commer- cial real estate and corporate debt markets. The FHFA said that the scenario was not a forecast, but a hypothetical future economic envi- ronment that was designed to "as- sess the strength of the Enterprises and other financial institutions and their resilience to unfavorable mar- ket conditions." Additionally, the report said that the planning hori- zon for the implementation of the 2019 stress test was over a period of nine quarters from December 31, 2018, to March 31, 2021. Additionally, compared to last year's stress test scenario, the 2019 severely adverse scenario includes a more severe recession and a larger increase in the unemployment rate. This year's severely adverse scenario, also includes a decline in the 10-year Treasury yield, a factor that had remained unchanged in the scenario last year result- ing in a much steeper yield curve and reflecting a global aversion to long-term fixed-income assets. This results in declines in certain asset prices, including stocks, which are less severe in this cycle versus last year. Reassessing the ATR/QM Rule The CFPB is seeking information relating to the expiration of the GSE Patch. T he Consumer Finan- cial Protection Bureau (CFPB) recently issued an Advance Notice of Proposed Rulemaking (ANPR) seeking information relating to the expiration of the temporary quali- fied mortgage provision applicable to certain mortgage loans eligible for purchase or guarantee by Fan- nie Mae and Freddie Mac, in the Bureau's Ability to Repay/Quali- fied Mortgage (ATR/QM) Rule also known as the GSE Patch. The Patch is scheduled to expire no later than January 10, 2021. The CFPB is soliciting com- ments on possible amendments to the Patch through the ANPR, including whether to revise Regulation Z's definition of a qualified mortgage in light of the Patch's scheduled expiration. The ANPR seeks information and comment on whether the definition of qualified mortgage should retain a direct measure of a consumer's personal finances (for example, debt-to-income ratio), and whether the definition should include an alternative method for assessing financial capacity. "Loans backed by Fannie Mae and Freddie Mac make up a large portion of the U.S. mortgage market," said Kathleen L. Kraninger, Director, CFPB. "The national mortgage market readjusting away from the Patch can facilitate a more transparent, level playing field that ultimately benefits consumers through stronger consumer protec- tion. We want to hear all perspec- tives on how to move beyond the GSE Patch, the impact on credit, the role of the private mortgage market, and possible modifica- tions to the definition of qualified mortgages and the rules governing the documentation of debt and income. The Bureau is committed to ensuring a smooth and orderly mort- gage market throughout its consideration of these issues and any resulting transition away from the GSE Patch." Earlier this year, the CFPB announced that it would be focusing its attention on the Patch, on loans that are eligible to be purchased or guar- anteed by either Fannie Mae or Freddie Mac. While proponents of the GSE Patch say that its expiry in 2021 would make homes less affordable, especially in the lower-tier housing market, an article in Forbes points out that if the Trump administration wants to improve housing affordability, "it needs to expand the role of private markets through increased competition." Writing for Forbes, Norbert Michael, Director of the Center for Data Analysis at The Heritage Foundation, said in the report that the CFPB should announce that the Patch will expire at its scheduled time in 2021. "Then, the Bureau can start working on im- proving the QM and Appendix Q , rules that are likely holding back private lenders," Michael wrote. The CFPB is soliciting comments on possible amendments to the Patch through the ANPR.

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