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Figure 1 • Enterprise Single-Family Mortgage Credit Risk Transfer Activity 2013-2015 2013 2014 2015 2013-2015 Note Size or RIF a (billions) Number of Transactions Covered Mortgage Loans b (billions) Scorecard Goal (billions) Percentage of Loans Covered vs. Scorecard Goal Fannie Mae $ 0.80 3 $ 31.20 $ 30.00 104% Freddie Mac $ 1.20 3 $ 44.80 $ 30.00 149% TOTAL $ 2.00 6 $ 75.90 – – Fannie Mae $ 6.10 11 $ 218.80 $ 90.00 243% Freddie Mac $ 5.60 10 $ 126.10 $ 90.00 140% TOTAL $ 11.70 21 $ 344.80 – – Fannie Mae $ 7.30 21 $ 228.80 $ 150.00 153% Freddie Mac $ 9.50 22 $ 188.30 $ 120.00 157% TOTAL $ 16.80 43 $ 417.10 – – Fannie Mae $ 14.20 34 $ 478.80 – – Freddie Mac $ 16.30 34 $ 359.20 – – TOTAL $ 30.60 70 $ 837.90 – – Source: Federal Housing Finance Agency a Volume of notes issued in debt transactions or risk-in-force (RIF) in insurance/reinsurance transactions. Equals the maximum credit loss exposure of private investors. b Unpaid principal balance of pools of mortgage loans on which credit risk is transferred. first risk transfer involving ARMs by either Enterprise. In addition, Freddie Mac completed two senior/subordinate securitizations. These deals transferred the credit risk on pools of super-conforming mortgage loans, which are originated in designated high-cost areas and have balances between the national conforming loan limit and higher limits applicable in high-cost areas. Diversity and Inclusion Efforts – The Enterprises developed plans to evaluate current qualification requirements that may present impediments, challenges, or unwarranted barriers to participation in Enterprise singlefamily credit risk transfer initiatives by diverse firms. Freddie Mac focused on gaining a better understanding of the impediments facing diverse firms, being proactive in educating diverse firms about its credit risk transfer programs, and communicating performance results for transactions in which the firms participated. Fannie Mae implemented a pilot program to expand the role of diverse selling group members involved in single-family credit risk transfer transactions, conducted broad outreach to a number of diverse dealers, and provided dealer product training on credit risk transfers. Credit Risk Transfers for Multifamily Credit Guarantee Business The 2015 Scorecard called on the Enterprises to initiate any feasible transactions that increased the amount of credit risk transferred via their existing multifamily credit risk transfer structures. 7 Freddie Mac developed and executed several new approaches to securitize older loans held in its portfolio, securitize supplemental loans provided to existing borrowers, re-securitize military housing bonds it had purchased, and use securitization to transfer 7 The Enterprises’ existing multifamily credit risk transfer structures include Fannie Mae’s Delegated Underwriting and Servicing (DUS) lender loss-sharing or Freddie Mac’s K-Deal capital markets execution via commercial mortgage-backed securities. 6 FEDERAL HOUSING FINANCE AGENCY
C O N S E R V A T O R S H I P S O F T H E E N T E R P R I S E S “On April 17, Fannie Mae and Freddie Mac issued final Private Mortgage Insurer Eligibility Requirements.” risk through a third-party investment fund. Freddie Mac also developed a securitization-based approach to create a fund to finance loan acquisitions during the aggregation period prior to K-Deal issuance. Fannie Mae completed a large volume of transactions under its Performing Note Sales program, transferring significant additional credit risk to the market. Fannie Mae also worked to develop a transaction that would transfer portions of the credit risk of its guaranteed multifamily securities, in a manner similar to its existing single-family credit risk transfers. Retained Mortgage Portfolios The 2015 Scorecard directed the Enterprises to continue to implement approved plans to reduce their retained portfolios. Further reducing the portfolios will continue to shift credit risk, asset liquidity risk, and interest rate risk from the Enterprises to private investors. Each Enterprise’s plan requires it to prioritize selling its less-liquid assets, such as non-agency securities, in a commercially reasonable manner, consistent with neighborhood stabilization. Each plan also requires that the Enterprise meet, even under adverse conditions, such as rising interest rates or falling house prices, the annual cap imposed by the PSPAs, ultimately declining to a $250 billion PSPA cap applicable on December 31, 2018. As of December 31, both Enterprises were below the yearend 2015 PSPA cap of $399 billion each. At year-end, Freddie Mac’s portfolio stood at $347 billion, and Fannie Mae’s was $345 billion, for a reduction in their combined portfolios of $130 billion in 2015. Much of the reduction at each Enterprise resulted from voluntary and involuntary prepayments. Prepayments totaled $63 billion at Fannie Mae and nearly $68 billion at Freddie Mac. In addition, each Enterprise transferred risk to private investors through the sale of less-liquid assets—about $15 billion by Freddie Mac and about $12 billion by Fannie Mae. For both Enterprises, the lessliquid assets were predominantly private-label mortgagebacked securities (MBS) and NPLs sold through auctions. The Enterprises explored a number of ways to include and engage minority- and women-owned firms and nonprofits in retained portfolio transactions. These included holding meetings with diverse firms, nonprofits, and public advocacy groups to discuss their NPL sales programs. The Enterprises also conducted training sessions for diverse firms and nonprofits to encourage their participation in retained portfolio transactions. Both Enterprises engaged diverse firms to serve as advisors for NPL sales and to assist with outreach to small investors and minority- and women-owned businesses. Private Mortgage Insurer Eligibility Requirements On April 17, Fannie Mae and Freddie Mac issued final Private Mortgage Insurer Eligibility Requirements (PMIERs), establishing financial standards that require mortgage insurers (MIs) to demonstrate adequate resources to pay claims and operational standards relating to quality control processes and performance metrics. Noncompliance with the requirements or material deviations from the performance expectations will trigger remediation. In June, the Enterprises revised the PMIERs to make technical corrections and include a new financial requirement for lender-paid mortgage insurance. Further technical corrections were made on December 21, and the revised requirements became effective December 31. During the second half of 2015, Fannie Mae and Freddie Mac engaged in a number of activities to implement the PMIERs. Specifically, the Enterprises reviewed and approved reinsurance agreements proposed by MIs to meet the PMIERs’ financial standards; worked with the MIs to understand and resolve issues with reporting templates; conducted reporting “dry runs” with the MI companies; and enhanced internal processes and procedures to incorporate additional analysis, monitoring, and governance requirements to support the PMIERs. REPORT TO <strong>CONGRESS</strong> • 2015 7
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