Senate Banking, Housing & Urban Affairs Committee Issues Testimony From Federal Housing Finance Agency Director Thompson (Part 2 of 2)
* * *
(Continued from Part 1 of 2)
* * *
This year, FHFA directed the Enterprises to expand their focus on rural areas as part of their Duty to Serve Plans.26 These programs support rural markets through small financial institution financing of rural housing, rural small multifamily rental properties, rural markets in high-needs regions and financing for high-needs rural populations. Beginning with their 2025-2027 Duty to Serve Plans, both Enterprises will develop strategies to serve the rural housing market nationwide. FHFA is adding new requirements for the Enterprises to report total single-family and multifamily loan purchases targeting very low-, low-, and moderate-income households across all rural areas in the country.
To better support access to credit in certain high-needs rural communities, in
Colonias are communities in
FHFA undertook the rulemaking to address challenges to the Enterprises engaging in activities in colonias. The amended rule will enable the Enterprises to better support both multifamily and single-family lending in these areas.
The Duty to Serve regulation also provides credit for Enterprise activities serving members of federally recognized tribes in tribal areas. Accordingly, both Fannie Mae28 and Freddie Mac29 included activities in their 2022-2024 Duty to Serve Plans to work with Native CDFIs to promote financing options and support the consumer education needs of
In 2023,
26 The Federal Housing Enterprises Financial Safety and Soundness Act, as amended by the Housing and Economic Recovery Act of 2008, requires the Enterprises to serve very low-, low-, and moderate-income families in three specified underserved markets - rural housing, manufactured housing, and affordable housing preservation.
27 FHFA, "FHFA Announces Final Rule Amending the Enterprise Duty to Serve Underserved Markets Regulation,"
28
29
* * *
...its Native American Conventional Lending Initiative, and both Enterprises are working to facilitate the financing of manufactured housing titled as real property in tribal areas.
FHFA is also aware of the difficulties many tribal members face when choosing to live outside of tribal lands, including in urban areas. These barriers - such as the lack of affordable housing supply, mortgage underwriting systems that do not incorporate rental payments or non-traditional income streams, and undervaluations in appraisals - are not unique to tribal members. They have also been identified as challenges for Black and Latino borrowers under the Enterprises' current Equitable Housing Finance Plans. Actions performed in accordance with these Plans will broadly benefit all communities that face similar barriers and challenges.
Enterprise Multifamily Activities
The acute affordability challenges renters are experiencing across the country - in urban and rural areas - are severely impacting low- and moderate-income households such as teachers, first responders and emergency aid personnel. It is critically important that these working families have the opportunity to live where they work.
FHFA has directed the Enterprises to preserve affordability in workforce housing by supporting the financing of multifamily properties with rent or income restrictions. The Conservatorship Scorecard identifies "mission-driven" categories of loans that an Enterprise may support to meet FHFA targets for achieving its mission. In 2023, FHFA created a new mission-driven category in the Conservatorship Scorecard to support the preservation of workforce housing,30 and the Enterprises collectively supported the financing of
Beginning in 2024, FHFA is allowing loans purchased by the Enterprises that preserve workforce housing to be exempt from the annual cap on an Enterprise's multifamily volume of
Additionally, both
30 FHFA, "2023 Scorecard for
31 FHFA, "2024 Scorecard for
* * *
Multifamily Tenant Protections
In
FHFA received thousands of comments from tenants and tenant advocates, nonprofits, lenders, multifamily borrowers/property owners, housing providers, developers, government officials, and mortgage industry groups.33 Prominent themes from tenants include high rents that impact tenants' standard of living, inadequate living conditions, costly and confusing application processes, and harmful lease terms. Housing providers expressed concerns that FHFA's adoption of tenant protections would increase costs and add compliance burdens. Respondents also highlighted the potential issues with a "one-size-fits-all" approach and questioned how
In 2023, FHFA focused on identifying the challenges tenants and housing providers face. In 2024, the Agency will focus on identifying solutions to these challenges.
It is important for FHFA to take a holistic view when considering potential policy changes related to tenant protections. Stakeholders broadly agree that more work is required to improve housing affordability, inform tenants of their rights and responsibilities, and expand housing supply. Both tenants and housing providers have proactively proposed solutions, and FHFA is convening these groups and other relevant stakeholders to develop a common framework to address these challenges.
However, the
Potential Tools to Address Limited Housing Supply
The federal Low-Income Housing Tax Credit (LIHTC) program is the Nation's predominant resource for creating new affordable rental housing. While the Enterprises cannot directly address supply shortages, their investments in LIHTC equity since 2018 have enhanced their ability to support the creation and preservation of affordable housing.
32 FHFA, "Tenant Protections for
33 FHFA, "Resident-Centered Practices at Multifamily Properties Backed by
* * *
For 2024, FHFA increased the LIHTC equity investment cap to
This adjustment increases the investments that must support housing in Duty to Serve-designated rural areas, preserve affordable housing, support mixed-income housing, provide supportive housing, or meet other affordable housing objectives.
In addition, the Enterprises will only make LIHTC investments in projects that waive the qualified contract provision, ensuring the 30-year affordability period envisioned by the LIHTC program.
With respect to the single-family market, the Enterprises do not have direct mechanisms to address the limited housing supply that has put significant pressure on affordability. New construction is largely driven by financial conditions for homebuilders and potential homebuyers, local zoning laws, and macroeconomic factors. The Enterprises continue to provide liquidity for new construction by purchasing mortgages on newly built properties. This includes a focus on encouraging the use of energy-efficient features in new construction.
Accessory Dwelling Units (ADUs) continue to be a housing solution in areas with high housing demand where they are permitted by local zoning rules. ADUs provide housing opportunities for renters and income-generating opportunities for homeowners. The Enterprises expanded their policies to allow documented ADU rental income to be used to qualify for financing, which supports the growth of this type of affordable rental housing. The Enterprises also offer renovation products that allow borrowers to refinance high-cost construction debt into a conforming mortgage, which further supports the construction of ADUs. FHFA will continue to take steps to advance the responsible use of ADUs to increase the supply of affordable housing.
Manufactured housing also plays an important role in building the supply of single-family affordable housing - not only in rural areas on privately held land and in manufactured housing communities (MHCs), but also in fee-simple subdivisions and infill housing in urban areas.
FHFA's Duty to Serve regulation provides credit for Enterprise activities in the manufactured housing market, and in 2023 the Enterprises exceeded targets for manufactured homes titled as real property and manufactured housing communities with specified tenant pad lease protections.
The future potential for manufactured housing extends beyond manufactured housing communities and personal property financing, including through its use for affordable infill opportunities with 2-4 unit homes as well as single-family detached homes that can be financed as real property. FHFA supports the responsible growth of the manufactured housing market, as this represents an opportunity to help address the nation's affordable housing supply challenge.
34 FHFA, "FHFA Announces Increase in the Enterprises' LIHTC Cap,"
* * *
Climate Risk and Property Insurance Impacts
The activities of
Accordingly, FHFA held two property insurance symposiums in the last six months - one focused on the single-family market35 and one focused on the multifamily market.36
When existing property insurance policies are not renewed - or coverage is reduced - the borrower, and ultimately the servicer, must find a new insurance provider, almost always at significantly higher cost, and sometimes with less coverage and more out-of-pocket costs for the homeowner. As a result, borrowers are left with higher payments for reduced insurance coverage. These higher payments can compromise a borrower's ability to make their monthly mortgage payments.
Increasing risks and damage from natural disasters and weather-related events are putting pressure on insurance markets and imposing mounting stress on local communities. This trend has been exacerbated by the steep rise in reinsurance rates, which has made it even more difficult for property insurers to manage these risks. The result has been a sharp increase in the cost of property insurance in several regions throughout the country, insurers limiting coverage in a growing number of areas, and some insurers pulling back from certain regions entirely.
The impact of climate change on multifamily insurance providers is similar to that of singlefamily providers, and insurance is critical for tenants and residents of multifamily properties, as well as for borrowers, lenders, and mortgage guarantors.
From 2022 to 2023, property insurance premiums on multifamily properties increased more than 20 percent overall - with even larger increases for properties that are located in areas prone to tornados, hurricanes, or floods. In places such as
35 FHFA, "FHFA to Host Property Insurance Symposium,"
36 FHFA, "FHFA to Host Multifamily Property Insurance Symposium,"
* * *
...is becoming more challenging. This dynamic exacerbates the limited availability of affordable housing, which has a disproportionate impact on the Nation's most vulnerable populations.
FHFA will continue to monitor the state of insurance markets and work to convene and develop actionable solutions with stakeholders and impacted parties.
Credit Score Initiative
FHFA is moving forward expeditiously with the Agency's credit score initiative, which entails two significant changes to the Enterprises' credit score requirements.
The first is a change from use of the Classic FICO model, which has been required for loans delivered to the Enterprises for nearly 30 years, to two newer models - FICO 10T and VantageScore 4.0. These newer models are more accurate and more inclusive. Requiring credit scores produced by two distinct models will provide the market with multiple views of credit risk, which in turn will improve risk management throughout the housing finance system.
The second is a change from the requirement that lenders use credit reports from all three nationwide credit bureaus to an option to use credit reports from only two of the three credit bureaus - the "tri-merge" to "bi-merge" transition. External research, as well as work undertaken by FHFA and the Enterprises, has found limited variation among scores between the tri-merge and bi-merge approaches.37 This change will also spur greater competition in the market, which should lead to improved outcomes for consumers.
This is a complex transition, and FHFA is taking great care to collaborate with market participants and other interested stakeholders.
In
FHFA has received thoughtful feedback through these forums, which will inform the Agency's implementation planning. For example, based in part on stakeholder feedback, FHFA announced that it is aligning the implementation timing of the bi-merge option and the new credit score models.39
37
38 FHFA, "FHFA Announces Next Phase of Public Engagement Process for Updated Credit Score Requirements,"
39 FHFA, "FHFA Announces Key Updates for Implementation of Enterprise Credit Score Requirements,"
* * *
FHFA is also accelerating the targeted publication date for the historical data to support use of the new models. This data will reflect credit scores provided by the new models for tens of millions of loans acquired by the Enterprises over a ten-year period. The publication of this historical data will allow market participants and other stakeholders to better understand these models and calibrate their own internal models, systems, and processes. This data publication represents one of the many ways in which FHFA is prioritizing transparency and providing extensive resources to assist market participants as they undertake this transition.
More broadly, FHFA's focus - first and foremost - is on getting the transition process right. The Agency is moving forward with a sense of urgency, while at the same time remaining flexible to operational considerations, stakeholder engagement and new developments.
FHFA believes similar processes have worked well for other large projects related to market infrastructure and operations, such as the transitions to the Uniform Mortgage-Backed Security (UMBS) and to the Secured Overnight Financing Rate (SOFR). FHFA is using the lessons learned from those transitions to ensure the credit score initiative is implemented efficiently and successfully.
Credit Risk Transfer
Since inception of the single-family CRT programs in 2013, CRT has successfully become a programmatic and integral component of the Enterprises' businesses. From the beginning of the programs through year-end 2023, the Enterprises transferred
CRT activity is largely driven by Enterprise acquisition volume and market conditions. The significant refinance activity in 2020 and 2021 led to a record level of single-family CRT issuance in 2022. CRT activity declined by approximately 60 percent in 2023, as rising interest rates and the resulting reduction in refinance activity spurred a significant decrease in singlefamily conventional loan acquisitions (approximately 55 percent decline in 2022, relative to 2021).
Driven by the more positive macroeconomic environment and broader market dynamics, CRT transactions were executed on more favorable terms (e.g., improved pricing) in 2023, particularly in the second half of the year.
Risk sharing with the private sector is also an integral part of the multifamily business models of both Enterprises. In 2023,
40 FHFA, "Credit Risk Transfer Progress Report - Fourth Quarter 2023,"
* * *
...transferred a portion of credit risk on 92 percent, or approximately
FHFA continues to view CRT as a key mechanism for the Enterprises to manage their credit risk and capital. The transfer of credit risk to a broad set of private investors is an important tool to reduce taxpayer exposure from potential losses, particularly while the Enterprises operate in conservatorship and are significantly undercapitalized.
Conservatorship and Enterprise Reforms
The priorities discussed above represent a portion of FHFA's ongoing work to ensure its regulated entities meet their missions in a safe and sound manner. With respect to
Today, the Enterprises operate much differently than they did in the lead-up to the 2008 financial crisis. They are more safe and sound, and are better positioned to achieve their missions in a sustainable manner - both during conservatorship and following the conclusion of the conservatorships.
Since entering conservatorship, the Enterprises have:
* Retained earnings and built their combined net worth to over
* Deployed multiple mechanisms to transfer credit risk to private investors;
* Reduced the size of their retained portfolios, which were a large source of losses in 2008;
* Improved their underwriting and loss mitigation policies;
* Developed books of business that reflect historically low levels of delinquencies and high levels of borrower equity;
* Created a new UMBS to increase liquidity in the market, as well as new securitization infrastructure to support this security;
* Enhanced their support for affordable housing and underserved communities; and
* Improved their internal risk management and corporate governance.
Despite this progress, the Enterprises must continue to increase their capital reserves and make further progress toward meeting the minimum requirements set forth in the Enterprise Regulatory Capital Framework. The Enterprises' combined net worth has grown substantially over the past few years, but the Enterprises remain well below their minimum capital requirements. In addition to matters related to capital, FHFA is working to ensure the regulatory and supervisory framework for the Enterprises will support their safety and soundness as well as their ability to fulfill their statutory missions.
A great deal of progress has been made on reforms to their practices and standards, management of risks, underwriting and loss mitigation policies, and securitization infrastructure. FHFA will build upon this work to promote the sustainability and durability of these reforms after the Enterprises exit conservatorship.
* * *
FHFA will continue to focus on achieving its statutory mission and, in doing so, work to ensure that the Enterprises and the
Thank you again for the opportunity to testify before you today.
* * *
Original text here: https://www.banking.senate.gov/imo/media/doc/thompson_4-18-24.pdf
Senate Banking, Housing & Urban Affairs Committee Issues Testimony From Federal Housing Finance Agency Director Thompson (Part 1 of 2)
Newsom’s latest insurance move could help Californians avoid canceled policies
Advisor News
- The silent retirement savings killer: Bridging the Medicare gap
- LTC: A critical component of retirement planning
- DOL proposes new independent contractor rule; industry is ‘encouraged’
- Trump proposes retirement savings plan for Americans without one
- Millennials seek trusted financial advice as they build and inherit wealth
More Advisor NewsAnnuity News
- F&G joins Voya’s annuity platform
- Regulators ponder how to tamp down annuity illustrations as high as 27%
- Annual annuity reviews: leverage them to keep clients engaged
- Symetra Enhances Fixed Indexed Annuities, Introduces New Franklin Large Cap Value 15% ER Index
- Ancient Financial Launches as a Strategic Asset Management and Reinsurance Holding Company, Announces Agreement to Acquire F&G Life Re Ltd.
More Annuity NewsHealth/Employee Benefits News
- Otsuka Medical Devices/Otsuka Pharmaceutical: Paradise Ultrasound Renal Denervation System for the Treatment of Resistant Hypertension, Now Covered by Insurance and Commercially Available in Japan
- After enhanced Obamacare health insurance subsidies expire, the effects are starting to show
- CommunityCare: Your Local Medicare Resource
- AG warns Tennesseans about unlicensed insurance seller
- GOVERNOR HOCHUL LAUNCHES PUBLIC AWARENESS CAMPAIGN TO EDUCATE NEW YORKERS ON ACCESS TO BEHAVIORAL HEALTH TREATMENT
More Health/Employee Benefits NewsLife Insurance News
- Baby on Board
- Kyle Busch, PacLife reach confidential settlement, seek to dismiss lawsuit
- AM Best Revises Outlooks to Positive for ICICI Lombard General Insurance Company Limited
- TDCI, AG's Office warn consumers about life insurance policies from LifeX Research Corporation
- Life insurance apps hit all-time high in January, double-digit growth for 40+
More Life Insurance News