What Is the Federal Housing Finance Agency (FHFA)?
The Federal Housing Finance Agency (FHFA) is a regulatory agency in the United States that holds oversight over the secondary mortgage market and its participants. Created in 2008, the FHFA's primary duties encompass the supervision of Fannie Mae, Freddie Mac, the 11 banks constituting the Federal Home Loan Bank (FHLB) System, and the Office of Finance (OF), which operates as a collaborative entity of the FHLBanks.
In the aftermath of the 2008 financial crisis, the Federal Housing Finance Agency emerged as a crucial U.S. regulatory agency entrusted with the oversight of the secondary mortgage market. Enacted through the Housing and Economic Recovery Act, the establishment of the FHFA aimed to reinstate confidence and stability in the mortgage market.
The FHFA assumes responsibility for supervising and managing two prominent entities within the mortgage industry: Fannie Mae and Freddie Mac. These government-sponsored mortgage-makers play a significant role in the housing market. Furthermore, the FHFA exercises regulatory authority over the banks that comprise the Federal Home Loan Bank System.
An early measure taken by the FHFA was the implementation of conservatorship for Fannie Mae and Freddie Mac. This decisive action aided in restoring their financial solvency, reinforcing their operational capabilities in the market.
What Does the Federal Housing Finance Agency Do?
As an independent agency, the Federal Housing Finance Agency (FHFA) plays a vital role in safeguarding the United States' financial systems. As a member of the Financial Stability Oversight Council (FSOC), the FHFA collaborates with other agencies to identify and address potential risks. Remarkably, the FHFA does not rely on congressional funding, but instead operates on the fees collected from the entities it regulates.
The core mission of the FHFA centers around ensuring the safe and sound operation of the regulated entities and fostering a competitive, liquid, efficient, and resilient housing finance market throughout economic cycles. It holds the authority to place government-sponsored enterprises (GSEs) under receivership or conservatorship, effectively supervising and rehabilitating them during times of distress.
With an eye toward the future, the FHFA has established three key goals:
- Enhance credit availability and prevent foreclosures for all mortgage holders.
- Mitigate the risk to taxpayers by increasing private capital participation within the mortgage market.
- Develop a new securitization infrastructure for single-family homes through Fannie Mae and Freddie Mac, adaptable for future use in the secondary market.
Federal Housing Finance Agency and Secondary Markets
Playing a vital role in the realm of secondary markets, the Federal Housing Finance Agency facilitates the trading of existing mortgages and mortgage-backed securities (MBSs). In conjunction with Fannie Mae and Freddie Mac, the Federal Home Loan Bank (FHLB) system serves as a significant funding source, providing nearly $7.2 trillion to support U.S. financial institutions and mortgage markets. Membership within the FHLB system extends to a diverse array of entities, including thrift institutions, credit unions, insurance companies, commercial banks, and other financial institutions.
Beyond offering lower-cost mortgages, the FHLB system delivers valuable services to its members. These include asset-liability management, liquidity provisions to address interim needs, and funding for community development projects. Given its immense importance, the FHLB system constitutes a critical component of the U.S. financial system, with approximately 80% of U.S. lenders relying on FHLBanks.
Furthermore, the FHFA holds a significant position within the Financial Stability Oversight Council. This council actively seeks to identify and address any potential risks that could undermine the financial security of the United States.
History of the Federal Housing Finance Agency
In the aftermath of the subprime mortgage crisis in 2007, followed by the global financial crisis and the Great Recession, the Federal Housing Finance Agency emerged as a critical institution. Its establishment can be traced back to the Federal Housing Finance Regulatory Reform Act, which was enacted as a sub-act of the Housing and Economic Recovery Act (HERA) on July 30, 2008. This legislation aimed to strengthen the U.S. housing-finance system, which had been severely impacted by the crisis.
The FHFA assumed the responsibilities previously held by two entities: the Office of Federal Housing Enterprise Oversight and the Federal Housing Finance Board, the original overseer of the Federal Home Loan Bank system. These agencies ceased to exist one year after the passage of HERA, with the FHFA taking over their legal and regulatory authority.
The underlying objective of the Housing and Economic Recovery Act was to restore public confidence in the government-sponsored enterprises primarily responsible for backing and purchasing home loans—specifically, Fannie Mae and Freddie Mac. The FHFA played a pivotal role in achieving this aim. Equipped with significantly expanded authorities compared to its predecessors, as emphasized by its director James Lockhart, the FHFA wasted no time in exercising its newfound powers to assume control over the distressed GSEs.
Federal Takeover of Fannie Mae and Freddie Mac
Taking swift action as a newly established agency, the FHFA made decisive moves by placing Fannie Mae and Freddie Mac under conservatorship on September 6, 2008.
The subprime mortgage meltdown had severely impacted the two government-sponsored enterprises that played a dominant role in the mortgage market. Fannie Mae and Freddie Mac, which purchased and guaranteed mortgages originated by banks and lenders, incurred significant losses on their loan portfolios starting in 2007, ultimately accumulating billions of dollars in debt by 2008. As the largest market-makers in the U.S. mortgage industry, their financial struggles triggered widespread panic across the banking and investment sectors, fueling the broader financial crisis.
Responding to the dire circumstances, the FHFA intervened in the autumn of 2008. It orchestrated a $190 million bailout package from the U.S. Treasury, while simultaneously undertaking extensive restructuring of the GSEs' boards of directors. Moreover, the FHFA embarked on implementing strategies to curtail losses and mitigate operational and credit risks.
Over time, Fannie Mae and Freddie Mac gradually regained solvency, successfully repaying the $190 million in bailout funds. In September 2019, the Treasury and FHFA jointly announced that Fannie Mae and Freddie Mac could retain their earnings to bolster capital reserves, amounting to $25 billion and $20 billion, respectively.
In October 2019, the FHFA released a comprehensive Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac, outlining three overarching objectives. These objectives aimed to ensure that the GSEs focused on their core mission of fostering competitive, liquid, efficient, and resilient national housing finance markets that support sustainable homeownership and affordable rental housing. Additionally, the plan emphasized the importance of operating in a safe and sound manner befitting entities in conservatorship and preparing for their eventual exit from conservatorship. These objectives were reaffirmed in 2020 and 2021, underscoring the FHFA's commitment to guiding Fannie Mae and Freddie Mac through their ongoing conservatorships.
Understanding FHFA and its Regulatory Scope
The Federal Housing Finance Agency (FHFA) and Its Regulatory Role.
The FHFA operates as an independent regulatory agency within the executive branch of the United States government. Its establishment dates back to the Housing and Economic Recovery Act of 2008. As an independent agency, the FHFA holds responsibility for overseeing and regulating various housing Government-Sponsored Enterprises and financial entities.
The Distinction between FHFA and FHA.
It is essential to differentiate between the FHFA and the Federal Housing Administration (FHA). While the FHFA focuses on the regulation of housing GSEs, the FHA operates under the Office of Housing and Urban Development (HUD) and provides mortgage insurance for approved lenders nationwide.
FHFA's Regulatory Authority and Collaboration.
The FHFA, as a member agency of the Financial Stability Oversight Council, actively contributes to identifying risks to the stability of the U.S. financial system. The council's mandate involves promoting market discipline and addressing emerging risks that could potentially jeopardize the integrity of the financial system.
Collaboration with HUD.
Although independent from HUD, the FHFA works closely with this agency in its oversight of the mortgage finance market. The FHFA incorporates the collective staff and resources of various entities, including the former Office of Federal Housing Enterprise Oversight (OFHEO), the former Federal Housing Finance Board (FHFB), and the GSE mission office at HUD.
GSEs Regulated by FHFA.
The FHFA exercises its regulatory authority over several housing GSEs. Notably, it oversees Fannie Mae and Freddie Mac, collectively referred to as the Enterprises. Additionally, the FHFA regulates the Federal Home Loan Banks (FHLBs) and the FHLBanks' joint Office of Finance, which operates within the Federal Home Loan Bank System.
Through its distinct role and comprehensive oversight, the FHFA plays a crucial part in maintaining stability and promoting the efficient functioning of the housing finance market.
The Federal Housing Finance Agency plays a crucial role in overseeing the U.S. secondary mortgage market. It was established to restore stability after the 2008 financial crisis and aims to prevent a housing collapse. The FHFA's policies create a stable environment, protect the interests of lenders and borrowers, and promote trust in the market. It regulates financial institutions, curbs excessive risk-taking, and ensures responsible lending practices. Understanding the FHFA's significance empowers individuals in navigating mortgage financing confidently.