Decoding Compliance

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feature s e c on da r y m a r k e t a na ly t ic s se r v ic i ng Or ig i nat ion SECONDARY MARKET P itting progress against process, the Federal Housing Finance Agency (FHFA) revealed its 2013 objectives for the governmentsponsored enterprises (GSEs), rolling out an approach best analogized as "three steps forward, two steps back." Literally. How will the FHFA attempt to finally reduce market share held by the two existing GSEs? By forming a third, independent business that would "function like a market utility," according to the FHFA's acting director, Edward DeMarco, whose statements elaborated on proposals first debuted by the agency in 2012. "We believe that setting up a new structure that is separate from the two companies is important for building a new secondary mortgage market infrastructure … as opposed to rebuilding the proprietary infrastructures of Fannie Mae and Freddie Mac," DeMarco noted, explaining the organization's 2013 Conservatorship Scorecard. Unsurprisingly, the FHFA's efforts to shrink Freddie and Fannie by establishing yet another venture has drawn industry opposition, and detractors are especially concerned with the agency's plan to initiate the entity under ownership and funding by the GSEs. While those challenging the FHFA's concepts are presenting conscientious objections, they aren't delivering sound solutions. For mortgage banking, the questionable future of the government's role in housing remains a roadblock to full, robust recovery. And as the marketplace hopes for the emergence of viable alternatives, lenders can advance strategic efforts by conducting an impartial examination of the FHFA's current proposals. Futuristic Infrastructure The Objective "[T]he overarching goal is to 76 | The M Report create something of value that could either be sold or used by policymakers as a foundational element of the mortgage market of the future," DeMarco stated, defining the agency's plans to form a third entity that could "facilitate the entry of private capital investment in credit risk." Dubbed the Common Securitization Platform (CSP), the new organization would "support the securitization business of the enterprises while in Freddie exiting conservatorship and returning to the private sector, stating, "Of the various legislative proposals that have been introduced in Congress, none of them envision the enterprises exiting conservatorship in their current corporate form." Elaborating on the discrepancy, the FHFA clarified that "there are certain elements for rebuilding the housing finance system that are needed regardless of its ultimate structure. In particular, a future housing finance system needs an operational mechanism that connects capital market investors to borrowers by bundling mortgages into securities and tracking payments." Demarco added, "We are designing this to be flexible so that the long-term ownership structure can be adjusted "We believe that setting up a new structure that is separate from the two companies is important for building a new secondary mortgage market infrastructure . . . as opposed to rebuilding the proprietary infrastructures of Fannie Mae and Freddie Mac." —Edward DeMarco, FHFA conservatorship" and "would conserve taxpayer funds from maintaining and upgrading two parallel infrastructures during their transition to a yet to be determined future state." The Rationalization Citing the lack of "any meaningful secondary mortgage market mechanisms beyond the enterprises and the Government National Mortgage Association," the FHFA touted the CSP as the best plan for removing impediments preventing "the transition to a post-conservatorship secondary mortgage market." Interestingly, DeMarco does not anticipate either Fannie or to meet the goals and direction that policymakers may set forth for housing finance reform . . . . It will also be physically located separate from Fannie and Freddie. Importantly, we plan on instituting a formal structure to allow for input from industry participants." In 2013, DeMarco's proposed path for working toward a new infrastructure component includes: •• Confirm plans for "ownership" of the CSP. •• Determine a leadership profile for the new entity. •• Establish the design, scope, and functional requirements for the CSP's modules, as well as the initial business operational process model. •• Develop long-term plans for building, testing, and implementing the CSP, with a focus on the enterprises' related system and operational changes. •• Begin the testing phase for the CSP. The Criticism Under the FHFA's current plans, the GSEs would draw funds from the Treasury to support the establishment of the infrastructure outlined by DeMarco. Speaking to Fox Business News, the Mortgage Bankers Association's chief economist, Jay Brinkmann, expressed, "All the money they spend is less money that comes back to the Treasury. It's not looking at the total picture of what this transition could look like, and what we're afraid of is, if it doesn't take that into account, we are looking at a lot of lost money that is going to come back to hurt the taxpayers." In the Cut The Objective Seeking to cut "the enterprises' dominant presence in the marketplace, while simplifying and shrinking their operations," the second of the FHFA's key goals for 2013 is kicking off contractions for Fannie and Freddie by reducing their respective market share. The Rationalization "Despite some signs of normalization in the housing market, our nation finds itself in the uncomfortable position of having over 90 percent of new mortgage originations supported by the federal government," emphasized DeMarco. Continuing his commentary, DeMarco provided insight into the FHFA's strategic approach, noting, "In 2012, guarantee fees were increased twice . . . . We also expect to continue increasing guarantee fees in 2013, and the execution of the single-family risk sharing transactions I just

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