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mortgage credit. For its part, the government would explicitly provide robust oversight, protect consumers and investors, assist low- and moderate-income homeowners and renters, help stabilize the market, and respond to crises. 104 In August 2013, President Obama clarified the Administration’s plan for reforming the enterprises. The Administration’s plan includes four core principles: • Put private capital at the center of the housing finance system; • Wind down the enterprises; • Ensure widespread access to safe, responsible financing, like the 30-year fixed-rate mortgage; and • Support affordability and access for renters and homeownership for first-time buyers. 105 Individual members of Congress have also made proposals. For example, on June 25, 2013, eight members of the Senate Banking, Housing and Urban Affairs Committee introduced a bill, the Housing Finance Reform and Taxpayer Protection Act of 2013. 106 The bill calls for greater private-sector participation in the secondary mortgage market, winding down the enterprises over five years, and creating a new government insurance entity. 107 On July 22, 2013, five members of the House Financial Services Committee introduced housing finance reform legislation, entitled the Protecting American Taxpayers and Homeowners Act of 2013. 108 The bill winds down the enterprises over a five-year transition period and reduces the government’s role in the housing finance market. 109 Academics, industry experts, and interest groups also have made housing finance reform proposals. However, in spite of the diversity of sources, essentially there are only three categories of proposals: 110 • Private—the private sector takes over the secondary mortgage market; 111 • Public—the government takes over the enterprises’ current role; 112 or • Private/Public—the government provides some safety for private participants. 113 The private model relies upon private companies to buy and securitize mortgages and to guarantee payment of principal and interest on the resulting securities. Under this model, the government does not guarantee the companies or the securities. The key to most of the private model options is to wind down the enterprises over a defined period of years. 114 In theory, this will provide an incentive for privatesector participation as guarantee fees increase to what the market will bear. In the public model, a government corporation replaces the enterprises, and it buys, securitizes, and sells residential mortgages. Approved lenders pay guarantee fees to the corporation in order to ensure timely payment of interest and principal on the resulting securities. 115 This type of proposal requires the federal government to back all of the corporation’s obligations, or at least to guarantee MBS’ principal and interest payments. Many envision a private and public hybrid model for the secondary mortgage market. In the broadest context, the hybrid model calls for private participants to buy and securitize mortgages from approved lenders with some form of government guarantee. 116 Such proposals tend to vary according to the level Semiannual Report to the Congress • April 1, 2013–September 30, 2013 53
of government support, with many models also proposing government intervention during economic crises. 117 Figure 20 (see page 55) highlights the major reforms and reformers. These proposals can be expected to grow more detailed as they progress since specific issues, such as establishing underwriting standards and managing risk, will need to be resolved. The following is intended to serve as a backdrop to deliberations about these more granular issues. Soundness: Lessons from the Past Our work has corroborated several lessons learned from the housing crisis: a sound housing finance market should include quality underwriting, robust risk management, and servicers who have incentives to align their interests with those of other market participants. Below, we review the historical basis for recognizing these lessons when reforming housing finance and then discuss some of our work that supports their importance. U.S. property values spiked from 2001 to 2006—an average of 12% each year. 118 As the boom proceeded, underwriting standards loosened and lenders increasingly approved higher mortgages for higherrisk borrowers who had little to no down payments, unverified incomes, and high debt. Associated credit risks spread throughout the financial system as these mortgages were bundled into publicly traded enterprise and private-label MBS. 119 The dominant players in the secondary mortgage market before the boom, Fannie Mae and Freddie Mac took steps to maintain their market share during it. In 2001, the enterprises began buying—for their own investment portfolios—private-label MBS, many of which were collateralized by subprime mortgages. 120 According to the Government Accountability Office (GAO), the enterprises’ holdings of private-label MBS increased rapidly from 2003 to 2006. 121 This helped Fannie Mae’s assets and guaranteed mortgages grow from $1.3 trillion in 2000 to $3.1 trillion in 2008, while Freddie Mac’s increased from $1 trillion to $2.2 trillion during the same period. 122 As mortgage volume grew, the enterprises agreed to buy and guarantee higher-risk loans. 123 Traditionally, the enterprises confined their businesses to lower-risk, prime loans. 124 But, during the housing boom, Fannie Mae, for instance, issued large numbers of variances, or exceptions, from its underwriting guidelines that permitted it to buy higher-risk products, such as zero down payment mortgages made to buyers with low credit scores and unverified income. 125 In 2006, home prices leveled off, and the housing boom turned into a bust. 126 In 2007 and 2008, the enterprises began losing billions of dollars on their multi-trilliondollar MBS guarantees and investments. 127 In the aftermath, many serious questions have arisen regarding the origination and securitization process. 128 Notably, during the summer of 2011, FHFA filed lawsuits against 18 large financial institutions, alleging violations of federal and state securities laws in connection with sales of privatelabel MBS to the enterprises. FHFA is pursuing fraud and other claims, alleging misleading disclosures about the quality of the mortgages that were used to securitize the MBS. FHFA’s complaints allege that the mortgage collateral securing the private-label MBS had materially different and higher-risk characteristics than described. 129 Although there are different perspectives on which factors were most to blame for the housing crisis, it is generally agreed that contributing causes 54 Federal Housing Finance Agency Office of Inspector General
Page 2 and 3:
Federal Housing Finance Agency Offi
Page 4 and 5:
Section 3: Lessons for Housing Fina
Page 6 and 7:
OIG’s Accomplishments from 2010 t
Page 8 and 9:
A Message from the Acting Inspector
Page 10 and 11: insures mortgages against credit lo
Page 12 and 13: Semiannual Report to the Congress
Page 14 and 15: in a number of criminal and civil i
Page 16 and 17: Figure 3. Scoring of Investor Quali
Page 18 and 19: and provide for financial consequen
Page 20 and 21: Figure 5. Agreements Between Fannie
Page 22 and 23: 2010 to 2012, but the attrition rat
Page 24 and 25: Figure 8. Estimated Enterprise Aggr
Page 26 and 27: operations that pose the greatest r
Page 28 and 29: poor financial condition, Appalachi
Page 30 and 31: fraud and wire fraud involving a fi
Page 32 and 33: This was a joint investigation with
Page 34 and 35: y falsified, forged, and altered do
Page 36 and 37: Short Sale Schemes A short sale occ
Page 38 and 39: This was a joint investigation with
Page 40 and 41: at Appalachian concealed past due l
Page 42 and 43: indemnification payments that OIG p
Page 44 and 45: the SEC, and others. In July 2013,
Page 46 and 47: Figure 10. Overview of the Enterpri
Page 48 and 49: Figure 12. Enterprises’ Annual Ne
Page 50 and 51: Figure 14. Home Price Index 2011 Th
Page 52 and 53: educe the principal balance of Trea
Page 54 and 55: Figure 17. FHLBanks’ Net Income f
Page 56 and 57: multifamily housing lending busines
Page 58 and 59: The bill would replace the enterpri
Page 62 and 63: Figure 20. Reform Models and Reform
Page 64 and 65: Multifamily We have also found indi
Page 66 and 67: Based on recent history, a reformed
Page 68 and 69: Figure 26. The Mortgage Servicing P
Page 70 and 71: Even though the FHFA senior examine
Page 72 and 73: assistance to homeowners and to use
Page 74 and 75: positive NPV, then the servicer is
Page 76 and 77: Siloed Practices: Harmonizing Busin
Page 80 and 81: overseen by FHFA. As conservator, F
Page 82 and 83: Interest Rate Swap: An interest rat
Page 84 and 85: References Federal Deposit Insuranc
Page 86 and 87: Department of the Treasury Financia
Page 88 and 89: Acronyms and Abbreviations Agency A
Page 92 and 93: Figure 29. Summary of OIG Recommend
Page 94 and 95: No. Recommendation Report Status AU
Page 104 and 105: No. Recommendation Report Status EV
Page 110 and 111:
Semiannual Report to the Congress
Page 112 and 113:
Page 114 and 115:
Audit and Evaluation Reports with R
Page 116 and 117:
Appendix D: OIG Reports See www.fhf
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Appendix F: Description of OIG Offi
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Strategic Goal 2—Operating with I
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Figure 17. Federal Home Loan Banks
Page 124 and 125:
Page 126 and 127:
15 Federal Housing Finance Agency,
Page 128 and 129:
33 Fannie Mae, “Multifamily Busin
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Federal Home Loan Banks Office of F
Page 132 and 133:
to FHFA Scorecard Directive, at 48,
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it is preferable to limit our discu
Page 136 and 137:
Position in the Housing Finance Sys
Page 138 and 139:
144 Fannie Mae, “Comparison of Mu
Page 140 and 141:
157 Id., “Mortgage Servicing,”
Page 142 and 143:
184 Federal Housing Finance Agency,
Page 144 and 145:
Transparency and Certainty for Lend
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