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Figure 20. Reform Models and Reformers and Their Proposals Reform Models Private Model Hybrid Model Government Model • Private companies purchase and securitize mortgages and guarantee the principal and interest payment • No explicit guarantee by the federal government • Key to most options is the wind down of the enterprises over 10 or 15 years • One proposal suggests a temporary governmental agency to guarantee the principal and interest payment • Blended—private entity or entities purchase and securitize mortgages with some government guarantee • Some models advocate full replacement of the enterprises • Governmental intervention mechanisms in times of economic hardship • Private sector to absorb losses before the federal guarantee is tapped • Government-owned corporation replaces the enterprises • Federal government backs all obligations or at least guarantees the principal and interest payments • Approved mortgage originators pay a guarantee fee to the corporation to secure payment of interest and principal Reformers and their Proposals The Administration Legislative Proposals Academics, Industry Experts, and Interest Groups • Make the private market the primary source of mortgage credit • Phase out the enterprises • Government should provide oversight, protection, targeted assistance, and support for market stability and crisis response • Modify the enterprises or create a new private or government-owned company to replace them • Focus on improving accountability, lowering the government’s costs, and reducing the enterprises’ competitive advantage • Generally envision a private mortgage market backed by some type of governmental guarantee • Argue for less volatility in housing credit and more protection in times of financial crisis by having a buyer “of last resort” providing additional liquidity • Suggest splitting the enterprises into entities that respectively hold their collective good and bad assets Semiannual Report to the Congress • April 1, 2013–September 30, 2013 55
included loosened underwriting standards, poor risk management, and servicers with little incentive to prevent foreclosures. Loosened Underwriting Standards Single-Family As discussed in one of our reports, Fannie Mae’s basic underwriting standards for mortgage loans secured by single-family homes have not changed much. On the other hand, the enterprise has granted variances that have had the effect of modifying its underwriting standards over time. Essentially, variances allow lenders to deviate from underwriting standards for mortgage loans they sell to the enterprises; for instance, the enterprises may allow no down payment instead of the minimum 5% they typically require. 130 As shown in Figure 21 (see above), Fannie Mae’s basic underwriting standards did not change significantly before 2006 or after 2011. However, as shown in Figure 22 (see below), the number of variances that Fannie Mae allowed declined substantially from 2006 to 2011. For Figure 21. Fannie Mae’s Underwriting Standards for 2006 and 2011 2006 2011 Collateral (LTV) 95 95 Capacity (Debt-to-Income) 36% 36% a Creditworthiness (Credit Score) N/A 660 b a The benchmark is 36% but can go up to 45% if there are strong compensating factors. b Minimum FICO score is 660 if LTV is greater than 75%. If LTV is less than or equal to 75%, then minimum FICO score is 620. example, in 2005 when standards were loosened, Fannie Mae authorized over 11,000 variances. Thereafter, Fannie Mae began rescinding variances, which tightened underwriting standards. Some of these canceled variances related to risky features, such as loans made with unverified income. 131 FHFA recognizes the critical role played by variances in setting underwriting standards and agreed with our recommendations to establish formal procedures for reviewing proposed changes to the enterprises’ single-family underwriting standards and variances from them. 132 Figure 22. Fannie Mae Variances Granted from 2005 to 2011 Number of Variances 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 January 2005 January 2006 August 2007 January 2008 January 2005: 11,718 Variances 857 Lenders September 2011: 638 Variances 188 Lenders January 2009 January 2010 January 2011 September 2011 1,000 900 800 700 600 500 400 300 200 100 0 Number of Lenders with Variances 56 Federal Housing Finance Agency Office of Inspector General
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Federal Housing Finance Agency Offi
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Section 3: Lessons for Housing Fina
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OIG’s Accomplishments from 2010 t
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A Message from the Acting Inspector
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insures mortgages against credit lo
Page 12 and 13: Semiannual Report to the Congress
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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
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Page 52 and 53: educe the principal balance of Trea
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Page 56 and 57: multifamily housing lending busines
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Semiannual Report to the Congress
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Audit and Evaluation Reports with R
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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
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Semiannual Report to the Congress
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15 Federal Housing Finance Agency,
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33 Fannie Mae, “Multifamily Busin
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Federal Home Loan Banks Office of F
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to FHFA Scorecard Directive, at 48,
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it is preferable to limit our discu
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Position in the Housing Finance Sys
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144 Fannie Mae, “Comparison of Mu
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157 Id., “Mortgage Servicing,”
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184 Federal Housing Finance Agency,
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Transparency and Certainty for Lend
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