Decoding Compliance

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the latest Or ig i nat ion SECONDARY MARKET Better Than No Help At All? a na ly t ic s se r v ic i ng GSE involvement in the market's recovery efforts may be hurting more than helping private markets. A Coalition Demands DeMarco's Dismissal s e c on da r y m a r k e t The FHFA's acting director faced more political backlash, as a coalition of attorneys general petitioned for his immediate replacement. A coalition of nine state attorneys general is petitioning Capitol Hill legislators to replace Federal Housing Finance Agency (FHFA) acting director Edward DeMarco. Charging DeMarco with positioning Fannie Mae and Freddie Mac as a "direct impediment to our economic recovery," the group called for his replacement in a joint letter to the president, the Senate majority leader, and the Senate minority leader. "The time has come for the President and Congress to work together to install a new, permanent leader at FHFA that will be a partner, not an impediment, in the national effort to comprehensively address the foreclosure crisis," said New York Attorney General Eric T. Schneiderman, a member of the coalition. The attorneys' general complaint stems from DeMarco's refusal to allow the 72 | The M Report government-sponsored enterprises (GSEs) to engage in principal reductions for struggling and underwater homeowners, an issue which has been the subject of contentious and lengthy debate between the acting director and other government officials. DeMarco, however, has remained firm in his stance that principal reductions are not in the best interest of the GSEs. The attorneys general argued that principal forgiveness is beneficial to homeowners, financial institutions, and the overall economy. They pointed out that this strategy is a key part of last year's National Mortgage Settlement and assert that the FHFA's aversion to the practice "is inconsistent with its combined goal of asset preservation and foreclosure prevention." The group suggested a portfolio of $200,000 loans that are performing is "far more profitable" than a portfolio of $250,000 non-performing loans, adding that DeMarco's insistence that principal forgiveness does not support the goal of asset preservation "is not supported by reality." Concluding its call to action, the group stated, "We believe that until new, permanent leadership is named to FHFA, [the GSEs] will continue to stand as a roadblock to comprehensively addressing the foreclosure crisis." The coalition includes Schneiderman, one of the leaders of last year's National Mortgage Settlement, along with Massachussetts Attorney General Martha Coakley and California Attorney General Kamala D. Harris, both of whom have been outspoken about efforts to handle the nation's most distressed borrowers. Attorneys general from Delaware, Illinois, Maryland, Nevada, Oregon, and Washington also participated in the coalition and signed the group's letter. s the private sector struggles with regulatory uncertainty, Fannie Mae and Freddie Mac will continue to maintain their dominant role in the housing market, according to a report from Fitch Ratings. Since the GSEs act as key players in the market's fragile recovery, political motivation for far-reaching GSE reform has been limited, the rating agency explained. Fitch noted the GSEs have seen stronger operating performance over the last three quarters of 2012. Amid the backdrop of rising home prices, Fannie Mae and Freddie Mac have been able to fund dividends to Treasury without requiring additional draws in recent quarters. Although regulators and politicians have emphasized the need for the private sector to enter the mortgage market, Fitch said that "results have been disappointing." For example, private-label securities issued in 2012 totaled $6 billion and nine out of 10 mortgages still have some form of government backing, according to Fitch. In order to attract private capital, Fitch says guarantee fees (g-fees) would need to increase. In 2012, the GSEs have seen two g-fee hikes, and the rating agency expects the trend to continue into 2013. Though, "Fitch believes that gfees may need to rise materially before non-agency execution becomes a convincingly viable alternative," the agency said. It also noted "hurdles" still need to be overcome before the private capital re-enters the market. "Bank balance sheet capacity for mortgage assets is constrained by impact on leverage ratios, Basel III liquidity rules, interest rate risk implications, and continued regulatory uncertainty," Fitch stated. Fitch also added uncertainty surrounding risk retention rules, as well as the limited supply of high-quality mortgage loans, have also led to limited activity from the private sector. Overall, Fitch says appetite from the private sector is likely to stay "muted."

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