Prepared Remarks of FHFA Deputy Director Naa Awaa Tagoe at the 2024 Mortgage Bankers Association Annual Convention & Expo

10/28/2024

Naa Awaa Tagoe, Deputy Director

Federal Housing Finance Agency

Remarks as Prepared for Delivery
October 28, 2024

Good morning! Thank you, Bob Broeksmit and the MBA staff, for the opportunity to be here today. I'm also delighted that I get to share the stage with HUD Acting Secretary Todman. Director Thompson sends her regards and wishes she could have joined in person.

This convention arrives as the nation continues to grapple with housing affordability challenges - both for homeownership and rental housing. I know that many of you are working overtime to extend access to sustainable credit to creditworthy borrowers, while also working to keep up with rapid innovation and changes within the housing market.

Elevated interest rates, combined with continued house price appreciation, have worsened affordability for prospective homebuyers. Many existing homeowners, meanwhile, have mortgages with historically low interest rates, which reduces their willingness to sell their homes, exacerbating a housing supply shortage.

While working to address these challenges, FHFA must also work to ensure the safety and soundness of our regulated entities. History continues to show us that sustainable access to credit and safety and soundness are not mutually exclusive pillars of financial regulation but are instead complementary. This has been a governing principle throughout Director Thompson's tenure leading FHFA, and it will continue to guide FHFA's decision-making going forward. It's "and-both" - not "either-or."

These principles can also be found in many of FHFA's accomplishments over the last few years - several of which have been announced at this convention.

Among these accomplishments are a broad recalibration of the Enterprises' upfront pricing framework to support borrowers limited by wealth or income, while ensuring the Enterprises' financial strength. Their combined net worth is now approximately $140 billion dollars, and their books of business reflect historically low delinquency rates and high levels of borrower equity. They also have effective credit risk transfer programs that allow them to transfer risk to private investors.

We also codified FHFA's fair lending oversight requirements for our regulated entities, including the ongoing development and maintenance of Equitable Housing Finance Plans that supported nearly two million families last year alone.

For mortgage servicing, the Enterprises announced enhancements to Flex Modification, available December 1, that will ensure more borrowers achieve meaningful payment reduction of at least 20 percent.

We have convened stakeholders from across the industry to focus on the affordability and availability of property insurance. The two major hurricanes that devastated the Southeast this fall - resulting in the tragic loss of life for hundreds of our fellow Americans and tens of billions of dollars in damage to property and infrastructure - underscore the urgency with which we must work to address challenges related to climate risk and property insurance.

As we all know, the primary safety net for households to insulate themselves against catastrophic weather-related losses is property insurance. Insurance is critical for borrowers, lenders, and mortgage guarantors, and the Enterprises require property and casualty insurance for each loan they purchase. As the number of natural disasters causing major damage to properties and infrastructure has risen dramatically, so too has the stress on insurance markets.

The result has been a sharp increase in the cost of property insurance in several regions throughout the country, as well as some insurers pulling back from certain regions entirely. FHFA held two insurance symposiums in the past year - one focused on the single-family market and the other focused on the multifamily market - to identify the most pressing challenges related to rising insurance costs, and we are continuing to collaborate with stakeholders to better inform our policy work.

This brings me to a related property insurance issue - the Enterprises' longstanding Guide policies that require borrowers' property insurance policies to provide for replacement cost value coverage. Replacement cost value is important to ensure borrowers have sufficient property insurance coverage to rebuild in the event of a total loss.

Moreover, replacement cost coverage benefits the Enterprises by preserving the value of the underlying mortgage collateral. FHFA and the Enterprises will continue stakeholder outreach to better understand the challenges associated with collecting replacement cost coverage information, with a focus on potential solutions and considering concerns raised by some market participants.

FHFA also has encouraged market innovations that have led - and continue to lead - to increased efficiencies that benefit borrowers, lenders, and others in the market. Through our TechSprints, for example, we continue to monitor, review, and explore emerging technological advances to promote responsible innovation in housing finance.

Despite the ever-accelerating evolution of technology, the housing finance industry depends largely on paper-driven processes. By harnessing the power of innovation in the industry, we can also make progress toward solving longstanding challenges the industry faces - such as closing the homeownership gap and addressing the lack of credit access and availability in underserved communities.

That's why FHFA has been leading in this area, particularly within the regulatory community.

These initiatives are the result of a careful balancing act to ensure the housing finance system responsibly serves creditworthy homeowners across the country in a safe and sound manner. And today, I am pleased to announce additional actions we are taking to further advance these goals.

Appraisal Data

I want to begin by discussing an issue that Acting Secretary Todman mentioned during her remarks. Over the past two years at this convention, FHFA has made announcements regarding the Uniform Appraisal Dataset - or UAD - which is an appraisal database derived from more than 68 million appraisal records.

The data - which we have released at the aggregate and appraisal levels - allows stakeholders to analyze and understand home valuation and price trends, including the problem of appraisal bias. And we all know that the more data we have, the better we can pinpoint a problem and identify solutions.

That is why I am pleased to announce that, after months of working closely with Acting Secretary Todman and her team at HUD, we are now including appraisal data from the Federal Housing Administration as part of our UAD releases.

The UAD previously included only appraisals submitted to Fannie Mae and Freddie Mac. The inclusion of data from FHA loan applications represents a significant expansion of the information available in the UAD.

Accurate home valuations are vital to all segments of the housing market. This is both a fair lending and a safety and soundness issue. This new data series further exemplifies the joint commitment of FHFA and HUD to promote transparency and serve as reliable information resources - and to ensure our housing finance system continues to prioritize fair valuations.

Appraisal Waivers

I would also like to share some updates about FHFA's ongoing work on appraisal modernization. At FHFA's instruction, the Enterprises have implemented a spectrum of alternatives to traditional appraisals in recent years. These alternatives include hybrid and desktop appraisals, as well as appraisal waivers and inspection-based waivers, which are appraisal waivers combined with property data collected by a trained and vetted professional.

Together, these appraisal alternatives have lowered costs; reduced loan cycle times during periods of high transaction volume; addressed constraints with appraiser capacity; and supported fair, equitable, and accurate valuations.

After careful consideration and analysis, FHFA is building on the long-running success of appraisal waivers by expanding eligibility for purchase loans. The maximum allowable loan-to-value ratio for full appraisal waivers will increase from 80 percent to 90 percent. And for inspection-based appraisal waivers, the maximum allowable LTV ratio will increase from 80 percent to 97 percent, consistent with standard Guide eligibility requirements.

To ensure the expansion of appraisal waivers is undertaken in a manner consistent with the Enterprises' safety and soundness, the Enterprises will institute appropriate risk management controls. And to be clear, the expanded eligibility of appraisal waivers does not constitute an expanded credit box, but rather will allow more first-time homebuyers, and particularly low- and moderate-income first-time homebuyers, to recognize the benefits associated with appraisal waivers.

This update represents a sensible step forward in the Enterprises' efforts to promote efficiencies in loan cycle times and cost savings in the broader mortgage market.

Loan Repurchase Alternatives

Now, let me turn to issues related to loan repurchases. At this convention last year, Director Thompson highlighted the extensive work undertaken by FHFA and the Enterprises to address industry concerns about elevated levels of loan repurchases. While largely a function of high origination volumes, we also heard issues regarding the fair, consistent, and predictable application of the Rep & Warrant Framework.

In addition to updating their processes to better align with the intent of the Rep & Warrant Framework, the Enterprises developed new approaches to alleviate some of the pressures that result from elevated levels of loan repurchases. For example, Fannie Mae reintroduced its Notice of Potential Defect, which provides lenders with more time to resolve defects before a loan repurchase is required.

Freddie Mac, meanwhile, established a pilot program to test a fee-based structure as an alternative to repurchases of performing loans. Under the pilot, in lieu of repurchasing defective - but performing - loans within the first 36 months of origination, lenders pay a fee based on the defect rate of their performing loan deliveries to Freddie Mac on that quarter's aggregate loan balance.

This pilot was met with enthusiasm from industry stakeholders, and the early results have been promising. Freddie Mac reported greater levels of lender engagement in the quality control process. The pilot also reduced lender repurchase costs for performing loans with defects.

Based on these positive results, I'm announcing that FHFA has authorized an expansion of this pilot to all Freddie Mac-approved lenders. Under this expanded pilot, lenders will be permitted to opt in or out of the fee-based structure annually.

For lenders who opt out of the fee-based performing loan repurchase alternative pilot, Freddie Mac is also adding a "Fee Only" option, for which the fee is charged on the defective loan only, in lieu of repurchase. This option will better align the repurchase alternative offerings across the Enterprises.

The broader availability of this fee-based repurchase alternative will allow Freddie Mac to better incentivize high-quality underwriting and ensure appropriate remedies for performing loans with defects.

We also look forward to the continued partnership between lenders and the Enterprises to improve loan quality through technology investments and appropriate quality control measures. By working collaboratively, there is a great opportunity to further reduce defects and repurchases.

Pricing Notifications

Finally, I'd like to turn to a discussion of the process by which the Enterprises communicate changes in their guarantee fee, or g-fee, pricing to the market.

Through engagement with lenders, FHFA and the Enterprises have received feedback that changes to g-fees sometimes occur without sufficient notice to avoid significantly impacting loan pipelines.

FHFA takes these concerns seriously, and that is why we provided ample time for implementation of changes to the upfront g-fee framework in 2022 and 2023.

However, pricing is also a key tool for the Enterprises to manage a series of objectives, including risk management, mission achievement, return thresholds, and product mix. Pricing is also influenced by market factors outside of the Enterprises' control, such as changes in interest rates and loan volumes. Because of this, pricing must be dynamic, and the Enterprises need to remain nimble.

To balance these priorities, FHFA is instituting an aligned practice for the Enterprises to provide advance notice of certain base g-fee increases that could otherwise have significant impacts on loan pipelines. Specifically, for lenders using the MBS swap channel, the Enterprises will provide 60-days advance notice of increases to base g-fees greater than 1 basis point.

This new practice will provide lenders more certainty when pricing loans, while still allowing the Enterprises to respond rapidly to evolving market conditions.

As I conclude, I want to emphasize again how proud we are of the collective work FHFA, our regulated entities, and stakeholders across the housing finance system have undertaken over the years to ensure a liquid mortgage market to help make housing more affordable. Despite this progress, we also recognize that we have much further to go. FHFA looks forward to continuing to work with you on our shared goals. Thank you again for having me here today.

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Contacts:

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