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53 » VISIT US ONLINE @ DSNEWS.COM Agency (FHFA) is enough to satisfy their key housing concern, which is the ability for low- to-moderate income families to buy homes. Key to this calculus is Democrats' sense that Watt is succeeding in his efforts to reduce credit overlays and increase originations among homebuyers of modest means. Recent announcements about a return to 97 percent financing, put- back guidelines, and other representation and warranty changes are the first step. In addition, with the presidential election on the horizon, there are only about eight to 10 months for meaningful legislating. e net result: ere is likely to be much movement by way of hearings, bills introduced, and debate. But absent an earth-shaking event, we do not expect comprehensive GSE reform legislation to be passed by Congress or signed by the president during the next two years. THE WILDCARD: UNSTEADY FREDDIE? A catalyst that likely would wake Congress from its inertia could be a new Treasury draw by Freddie Mac. As spreads between Fannie and Freddie widen and Freddie continues to lose market share, in combination with the required reduction in capital reserves and sluggish home price appreciation, some analysts' project that Freddie could face significant financial obstacles in the near future that may require a new draw on the U.S. Treasury. With one-time legacy repurchase settlements nearly concluded and creative financial accounting no longer able to shield Freddie, the old "Steady Freddie" unwittingly may be the catalyst for GSE reform. In a Republican Congress already hostile to the GSEs, such a draw by Freddie could trigger reactionary, emergency legislation by outraged conservatives. Such legislation has not been proposed, but one can envision that it would seek to drastically reduce the GSE footprint by increasing guarantee fees, lowering loan limits and requiring changes to the terms of the Senior Preferred Stock Purchase Agreements with the Treasury Department, to name a few possibilities. But even a new Treasury draw may not be enough to generate comprehensive housing finance reform. Without a comprehensive proposal on the table that has very wide bipartisan support at the time of such a draw, the GSEs may survive in conservatorship until after the 2016 election. THE ALTERNATIVE: REFORM THROUGH ADMINISTRATIVE ACTION Even if legislation does not move forward, we do expect there to be significant housing finance reform in the coming year—just done by FHFA. » Credit access expansion: Late last year, FHFA announced that the GSEs would resume purchasing 97 percent LTV loans, so long as they met certain compensating factors and other guidelines, such as the requirement for private mortgage insurance. e devil is in the details as to whether this will expand availability. » Loan limits: e FHFA announced that current GSE loan limits are maintained for most of the country and even increased in some areas, thus preserving the existing footprint. » Counterparty risk mitigation: Over the past year, FHFA has taken a closer look at risk posed by its counterparties. More work is expected to result from this undertaking with the release of the final requirements for private mortgage insurers and additional guidance on oversight for large, non-bank servicers. » Expanding the volume and variety of risk-share transactions: New risk- share transactions have proceeded since the Structured Agency Credit Risk and Connecticut Avenue Securities deals were first introduced. In the next few months, we can expect to see discussion of up-front risk sharing and transactions involving loans with LTVs in excess of 80 percent. » Development of the Common Securitization Platform (CSP): is is only starting with the recent appointment of a CEO, David Applegate. Industry should watch developments closely. e CSP may very likely be usable for any Fannie Mae and Freddie Mac successor. » Development of a common security: is project is developing on a secondary track, because significant questions remain as to whether the current Fannie Mae and Freddie Mac securities will be "harmonized" or "converged" as each GSE seeks self- preservation. » Federal Home Loan Banks (FHLB): e proposed eligibility and capital requirements for membership in the FHLB system have been resoundingly criticized by the industry. An active comment period and a great deal of dialogue prior to finalization is expected. » Principal reductions: We can expect newly active discussion on principal reductions in the coming months, as Senate Democrats press hard for relief to the still struggling homeowners. » REO purchaser eligibility: e FHFA recently announced changes that will permit existing REO properties to be sold to any qualified purchaser, which includes non-profits who buy it on behalf of former owners, and former owners themselves. It is unclear how this new directive works with the existing rule that requires former owners to wait three years after a foreclosure to be eligible for another GSE-guaranteed loan. However, this activity is sign of the FHFA desire to continue to help troubled borrowers. Absent a draw on the Treasury by Freddie Mac, GSE reform in the short run likely means nothing more than FHFA pronouncements. If such a draw occurs, don't expect the Republicans to want to go steady with the GSEs any longer. "Absent a draw on the Treasury by Freddie Mac, GSE reform in the short run likely means nothing more than FHFA pronouncements."

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