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» VISIT US ONLINE @ DSNEWS.COM 19 NEW YORK FED SAYS CONSERVATORSHIPS ACCOMPLISHED THREE OF FIVE OBJECTIVES e Federal Housing Finance Agency (FHFA)'s conservatorships of Fannie Mae and Freddie Mac, which reached their seventh anniversaries in September, accomplished three of five objectives, according to a commentary from the New York Fed titled, "Evaluating the Rescue of Fannie Mae and Freddie Mac." e quartet of Andreas Fuster, Joseph Tracy, and James Vickery of the New York Fed and W. Scott Frame of the Atlanta Fed said an optimal intervention by the government into the operations of Fannie Mae and Freddie Mac would include five elements: » e GSEs would be able to continue their core securitization function as going concerns, supporting the supply of mortgage credit. » e firms would continue to honor their current obligations as to debt and mortgage- backed securities. » Value of common and preferred equity in Fannie Mae and Freddie Mac would be extinguished, a reflection of their insolvent financial condition. » e firms would be managed with broader macroeconomic objectives in mind, rather than just maximizing the private value of the firms' assets. » e rescue would be structured so that long- term reform would be prompted within a reasonable period of time. According to the authors of the commentary, the conservatorships accomplished the first three of those five goals. "e financial lifeline provided by the U.S. Treasury enabled Fannie Mae and Freddie Mac to support mortgage supply through the crisis and its aftermath and to take up the slack left by the breakdown in nonagency securitization, thereby supporting the fragile housing market," the authors wrote. "Holders of agency debt and mortgage-backed securities did not suffer credit losses, insulating the broader financial system from contagion effects. And both common and preferred equity holders were effectively wiped out, consistent with market discipline." As far as the objective of aligning the activities of Fannie Mae and Freddie Mac with broader economic objectives, the authors contended the conservatorships were less successful. e conservatorships were required by law to put Fannie Mae and Freddie Mac in a "sound and solvent condition," but this focus at times conflicted with other public policy objectives, such as the GSEs' aggressive enforcement of "representations and warranties," whereby the firms "put back" large volumes of defaulted mortgages to their originators, according to the authors. As a consequence of the putbacks, underwriting standards were tightened and the cost of mortgage lending rose after the crisis, even though the putbacks were legally justified. On the fifth objective of producing long-term mortgage reform, the authors of the commentary contend the conservatorships have "strikingly failed." e authors pointed out that Treasury Secretary Henry Paulson said, "We described conservatorship as essentially a 'time out,' or a temporary holding period, while the government decided how to restructure the [government- sponsored enterprises]," but the "time out" is now more than seven years long with no end in sight to the conservatorships. Much legislation has been introduced to try to reform the GSEs and end the conservatorships. Nearly everyone agrees a private system should replace Fannie Mae and Freddie Mac, but lawmakers cannot agree on how to implement such a system. As a result, the conservatorships continue indefinitely. "e many legislative proposals to date all reflect the crosscurrents of trying to protect the taxpayer, preserve support for the 30-year fixed-rate mortgage, and keep homeownership affordable to a wide spectrum of borrowers," the authors wrote. "While the lack of action to date is not cause for optimism, the current situation provides a unique opportunity to put the U.S. mortgage finance system on a more stable footing, an opportunity that we hope is not wasted." BANKS HIT HARDER ON SUBPRIME LOANS THAN NON-BANKS Subprime residential mortgage loans in foreclosure serviced by banks experienced higher losses than loans serviced by non-bank firms in the top three foreclosure states over the last 12 months, according to a report from Moody's Investor Service. e Moody's report compared loan loss severities for both banks and non-bank entities in Florida, New York, and New Jersey for the past year. Loss severities on loans serviced by banks were reported to be more than 10 percent higher than loss severities on non-bank serviced loans in those three states, which accounted for 42 percent of all subprime loans in foreclosure in private-label residential mortgage-backed securities. "One of the main reasons bank-serviced loans see higher losses than non-bank- serviced loans is that the former usually have longer foreclosure timelines due to regulatory settlements," VP and senior credit officer William Fricke said. "e additional time needed to process foreclosures led banks' foreclosure inventories to grow, while non-bank servicers did not initially face the same scrutiny, keeping their inventories smaller and their foreclosure timelines shorter." Loans serviced by banks have longer foreclosure timelines, which increase expenses to the RMBS trusts that hold the loans, therefore causing higher losses on those loans. ose expenses include principal and interest advances on delinquent loans, tax and insurance payments, attorney fees, and property maintenance costs. According to Moody's, the establishment of the Consumer Financial Protection Bureau and the adoption of the National Mortgage Servicing Standards caused foreclosure timelines to lengthen for non-bank mortgage servicers. However, losses on loans serviced by banks are expected to remain higher than those serviced by non-bank entities through 2017 due to the large pipeline of loans in foreclosure for bank servicers as loans serviced by both banks and non-banks move slowly through liquidation, Moody's reported.

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