The regulator for Fannie Mae and Freddie Mac will clear one of its first major hurdles in January when it publishes a notice of proposed rulemaking to govern the risk-based capital requirements for the two government-sponsored enterprises.
In an exclusive interview with Mortgage Marketplace, Aida Alvarez, director of the Office of Federal Housing Enterprise Oversight, discussed the development of that risk-based rule, as well as OFHEOs 1995 agenda and some of key issues affecting mortgage lenders and the secondary mortgage market.
The deadline for OFHEOs GSE risk-based capital guidelines is the end of December. Alvarez, noting that the deadline was ambitious, has already notified Congress that it will not be met.
Those rules are, however, nearing completion and OFHEO expects to have an advanced notice of proposed rulemaking ready for comment in January, she said. It also plans to have minimum capital guidelines ready by then, and the stress test model for the GSEs later next year.
The completion of risk-based capital regulations, even though delayed, represents a significant accomplishment, Alvarez added, especially considering that the office has not been fully staffed since it was created by the 1992 Housing Act.
Alvarez has 45 people on staff now. That number will grow to a congressionally approved 65 in 1995 as the office continues to bolster its examinations staff, for which it is actively recruiting.
But OFHEO, like all other government agencies, will have to justify its budget to lawmakers again in the next fiscal year.
In light of the new Republican Con-gress, that may prove difficult particu-larly because incoming Senate Banking Committee Chairman Alfonse DAmato, R-N.Y., was reportedly a key player in the torpedoing Alvarezs original request for 60 staffers.
Still, she has a positive outlook. I think we have a good relationship with Senator DAmato and his senior staff people, she said. They were supportive of us and our budget for 1995 and we make it our business to keep him informedI have no reason to expect that would change. I think [Congress] wants to know what were doing and how were doing it, and thats fair.
Published reports suggest that Freddie was a driving force behind DAmatos action, a point that raises questions about how the relationship between OFHEO and the GSEs has developed.
Some secondary market analysts paint the relationship as quietly adver-sarial. Others discount that notion, how-ever. For her part, Alvarez sees the rela-tionship as positive and constructive, and maintains that the dialogue be-tween them is meaningful and constant.
They are very different in their styles and approaches, she said. And in outward appearances both companies are doing well and appear to be responsibly managed. It can only be a reinforcement of [their positions] if an independent, credible regulator can attest to the condition of those companies and, perhaps, validate what theyve been saying.
If there are disagreements, thats fine, she said. Well cross that bridge when we get to it. We appreciate the value of business, not hinder it. Were not talking a different language here. Theyre interested in having a healthy institutionso are we.
OFHEOs presence in the day-to-day operations of Fannie and Freddie has been, at least outwardly, practically nil.
However, Alvarezs outspokenness on two particular issuesspecifically automated underwriting and GSE issuance of structured notesmay have ruffled some feathers.
When Fannie and Freddie perfected their automated underwriting technologies, mort-gage bankers openly worried that it could be used to squeeze them out of the in-dustry they help-ed pioneer. Alva-rez was among the first regulators to speak out on the issue.
But some have questioned OFHEOs jurisdiction in this matter, asking if Fannie and Freddie have perfected their underwriting technologies to a point where a Realtor could safely originate a loan and sell it to the GSEs, why OFHEO should care.
Alvarez said OFHEOs interest was purely in regard to safety and soundness, and her office continue to monitor the process. We care about the credit quality of the loans being underwritten that might be effected by the automation process, she said, noting that she isnt currently worried about the safety of the process.
She did say, however, that it was OFHEOs job to know as much as possible about these new systems, and believes the automation of the mortgage lending industry was inevitable and would affect the home buyer positively. She also said that somewhere down the line, some in the industry could suffer.
Will some people be affected? Yes, she said. But when some people are affected adversely, other people benefitthats not something that we will pine on.
I understand the concerns of the mortgage bankers and there certainly is a human dimension to thatone has to feel some compassion for thatbut on the other hand, Fannie and Freddie have repeatedly assured that that is not what they intend. They work very closely with mortgage bankers, so you have to evaluate what the incentive would be for them to alienate [that industry].
As a regulator, our objective is to make sure that this does not in any way jeopardize [their] safety and soundness, she said. It means we need to understand what theyre doingits not our job to get into competitive and market situations. Thats not what were hired to do.
OFHEOs jurisdiction was also questioned when Alvarez warned institutional investors about the dangers of purchasing structured notes offered by the GSEs. The implications of the derivative-issuance activity of the GSEs have little bearing on the secondary mortgage market, but Alvarez she and other regulators were concerned that unsophisticated investors were buying those GSE instruments without being fully aware of the risks associated. Her warning was eventually echoed by all the banking regulators.
Another subject of import for mortgage bankers is how HUD sets the affordable housing performance goals for the GSEs. A recently leaked draft of the proposed rule for those goals puts the GSE low-mod requirement at 44% by 1998.
Alvarez is required to look at the safety and soundness implications of the goals and report to HUD if they put too much of a burden on either. Alvarez has seen the goals, but since they have yet to be made public refused comment. She did say, however, that OFHEO has outlined a specific research agenda to determine those implications.