The Federal Housing Finance Agency (FHFA) plays a crucial role in overseeing and regulating the secondary mortgage market in the United States. Established in 2008 under the Housing and Economic Recovery Act, the FHFA was created to restore confidence and stability to the mortgage market following the financial crisis. This article aims to provide an in-depth understanding of the FHFA, its responsibilities, and its impact on the housing finance market.
The FHFA is a regulatory agency responsible for supervising and regulating the secondary mortgage market. It operates as an independent agency and is a member of the Financial Stability Oversight Council (FSOC), which seeks to identify and address risks within the country's financial systems. Unlike many other government agencies, the FHFA does not rely on funding from Congress but is instead funded by the entities it regulates.
Responsibilities of the FHFA:
The primary mission of the FHFA is to ensure the safe and sound operation of the entities it regulates, promoting a competitive, liquid, efficient, and resilient housing finance market throughout the economic cycle. It oversees two government-sponsored enterprises (GSEs) that play a significant role in the mortgage market: Fannie Mae and Freddie Mac. Additionally, the FHFA supervises the 11 banks that comprise the Federal Home Loan Bank (FHLB) System and the Office of Finance (OF), a joint office of the FHLBanks.
The FHFA's goals for the future include maintaining credit availability and preventing foreclosures, reducing the risk to taxpayers by increasing private capital's role in the mortgage market, and creating a new securitization infrastructure for single-family homes through Fannie Mae and Freddie Mac.
Importance of the Secondary Mortgage Market:
The secondary mortgage market is a crucial component of the U.S. financial system. It involves the trading of existing mortgages and mortgage-backed securities (MBSs). Together with Fannie Mae and Freddie Mac, the Federal Home Loan Bank (FHLB) system provides substantial funding to U.S. financial institutions and mortgage markets, amounting to nearly $7.2 trillion. The FHLB system serves as a critical source of lower-cost mortgages, asset-liability management, liquidity, and community development funding for its members, which include various financial institutions.
History and Key Actions of the FHFA:
The FHFA was established in 2008 as a response to the subprime mortgage meltdown and the subsequent financial crisis. It replaced two previous entities, the Office of Federal Housing Enterprise Oversight and the Federal Housing Finance Board, to consolidate the regulatory authority. One of the early actions taken by the FHFA was placing Fannie Mae and Freddie Mac into conservatorship, which helped restore these GSEs to solvency.
The federal takeover of Fannie Mae and Freddie Mac was a significant event overseen by the FHFA. In 2008, as the two GSEs faced mounting losses due to the subprime crisis, the FHFA intervened and placed them under conservatorship. This action aimed to stabilize the mortgage market and restore confidence in these critical institutions. Over time, Fannie Mae and Freddie Mac were able to repay the bailout funds and have since taken steps to prepare for their eventual exit from conservatorship.
Summary
The Federal Housing Finance Association is the Conservator of Fannie Mae and Freddie Mac since the 2008 meltdown.
The FHFA was established as an independent government entity to oversee the secondary mortgage market. The FHFA is a regulatory agency which took over for the Federal Housing Finance Board and the Office of Federal Housing Enterprise Oversight (OFHEO).
It was created in 2008 by the Housing and Economic Recovery Act (HERA), and it oversees the operations of Freddie Mac, Fannie Mae, and the 11 federal home loan (FHL) banks. If you’ll recall, Fannie Mae and Freddie Mac provide liquidity to banks and transfer risk from them by buying their mortgage cash flows from them.
They then pool and tranche the mortgages in to securitized form (such as collateralized mortgage obligations, or CMOs // See: CDOs) for sale to investors. This was a large part of the problem that erupted in the crash of 2008, as bad debts were improperly rated and were separated by several degrees from their sources, so that investors, including institutional investors, didn’t always know what they were getting.
The FHFA regulates the secondary mortgage market and keeps Fannie Mae and Freddie Mac solvent and under close supervision.