On March 18, the FHFA Inspector General released a white paper detailing the challenges faced by the government-sponsored enterprises (GSEs) that could adversely affect their future profitability. According to the white paper, the GSEs’ return to profitability in 2012 was linked significantly to non-recurring sources of income such as the release of valuation allowances against deferred tax assets, settlements of disputed representation and warranty claims, and settlements of legal claims relating to mortgage-backed securities. Specifically, the OIG reported that non-recurring sources accounted for 60% and 45% of net income in 2013 and 2014 respectively. In addition, the white paper cites the GSEs’ requirement to decrease its retained portfolio annually by 15%, requirements to pay a quarterly dividend to Treasury, the possibility of lower guaranty fees, congressional inaction to adopt housing finance reform, and market conditions such as changes in interest rates and home prices as factors that could force the GSEs to draw on the Department of Treasury for a taxpayer-funded bailout.
On April 17, the FHFA announced that Fannie and Freddie have revised the requirements for private mortgage insurance companies insuring mortgage loans that Fannie and Freddie either own or guarantee. By setting financial and operational standards for the mortgage insurers seeking approval with Fannie and Freddie, the new requirements are designed to reduce risk to the GSEs. The new requirements are effective immediately for new applicants and will become effective December 31, 2015 for existing insurers already approved by Fannie and Freddie.
On January 21, the Committee on Financial Services, in a voice vote, agreed to a new oversight plan that identifies the areas that the Committee and its subcommittees plan to oversee during the 114th Congress. Notable sections of the oversight plan include: (i) examining the governance structure and funding mechanism of the CFPB; (ii) reviewing recent rulemakings by the CFPB and other agencies on a variety of mortgage-related issues; (iii) examining the effects of regulations promulgated by Dodd-Frank on community financial institutions; and (iv) examining proposals to modify the GSEs.
On December 8, Fannie Mae and Freddie Mac announced new loan programs allowing for a down payment as low as three percent intended to “remove barriers for creditworthy borrowers to get a mortgage” and provide them with “a responsible path to homeownership.” The “97 percent LTV” program launched by Fannie Mae targets first-time home buyers, while the Home Possible Advantage program introduced by Freddie Mac offers mortgage loans to low- and moderate-income borrowers. The recently announced options further the agencies’ efforts to establish a more stable mortgage market.
On December 1, the FHFA issued an advisory bulletin highlighting its supervisory expectation that Fannie and Freddie maintain the safety and soundness of their operations by closely assessing the risk profile of lenders and servicers. Under the new framework, any new lender or servicer that enters into a contract with Fannie or Freddie will undergo a thorough assessment of their capital levels, business models and whether they would be able to fulfill certain responsibilities under economic downturns. This includes buying back faulty mortgages or being able to work with borrowers to avoid foreclosure. Other risks, such as potential legal troubles, will also be examined.
On November 3, FHFA Director Mel Watt announced David Applegate as the CEO for Common Securitization Solutions, LLC (CSS). As detailed in FHFA’s 2014 Strategic Plan for the Conservatorships, the creation of CSS furthers the goal to build a new securitization infrastructure to meet the needs of Fannie and Freddie. Prior to being named to the CEO post at CSS, Applegate served as the President, CEO of Homeward Residential, Inc. In addition, Applegate previously served as an executive with GMAC Mortgage and GMAC Bank. CSS was created by both Fannie and Freddie to operate a new secondary mortgage infrastructure, Common Securitization Platform. The platform is intended to replace certain elements of the GSEs’ proprietary system with regards to securitizing mortgages and performing back-office administrative functions.
On October 20, Fannie Mae announced that, effective November 10, Brian Books would serve as its executive vice president, general counsel, and corporate secretary. Prior to his appointment, Brooks was the vice chairman and chief legal officer of OneWest Bank, where he “advised executive management and the board of directors on all key legal, risk, and strategic issues, developed and implemented strategies to manage litigation and government inquiries, and led the bank’s compliance with regulatory orders on mortgage servicing and foreclosures.” Additionally, Brooks has over 20 years of experience in the legal and business industry including serving as a managing partner at O’Melveny & Meyer before serving as OneWest Bank’s Vice Chairman and chief legal officer.
On October 20, Fannie Mae announced that its proprietary appraisal and analysis application, Collateral Underwriter, will become available to lenders in early 2015. Currently, Fannie Mae uses the tool to “analyze appraisals when a lender delivers a loan,” and the Agency anticipates that by providing greater certainty around repurchase rise, the tool will help “lenders expand access to mortgage credit.” Ultimately, Collateral Underwriter will allow lenders to evaluate the appraisal of a loan, address any potential issues, and then close and deliver the loan to Fannie Mae.
On October 21, a federal judge dismissed the claims brought by the State AG that the GSEs violated state law by putting limits on the sale of pre- and post-foreclosure homes. Commonwealth v. Fed. Hous. Fin. Agency, No. 14-12878-RGS, 2014 BL 295733 (D. Mass. Oct. 21, 2014). In this case, the State argued that the GSEs violated a state law by refusing to sell homes in foreclosure to nonprofit organizations who intended to restructure the loan and sell or rent the property back to the original homeowner at a lower price. The 2012 state law forbids banks and lenders from refusing to consider offers from legitimate buyback programs solely because the property will be resold to the former homeowner. The judge dismissed the lawsuit agreeing with the FHFA, conservator of the GSEs, that the Housing and Economic Recovery Act of 2008 (HERA) allows the FHFA to enforce restrictions under its conservatorship mandate authorized by Congress. Further, the judge noted that “Congress, by enacting HERA’s Anti-Injunction Clause, expressly removed such conservatorship decisions from the courts’ oversight.” The State is expected to appeal the decision.
On October 7, the GAO published a report to help policymakers assess proposals for changing the single-family housing finance system and consider ways to make it more effective and efficient. To this end, the report first describes the market developments since 2000 that have led to changes in the federal government’s role in single-family housing finance. Most notably, the GAO found that as the market share of nonprime mortgages grew before the 2007-2009 financial crisis, the share of new mortgage originations insured by federal entities (including Fannie Mae and Freddie Mac) fell dramatically before rising sharply again during and after the crisis. Second, the report analyzed whether and how these market developments created challenges for the housing finance system. The GAO concluded that mortgage markets since 2000 have challenged the housing finance system, revealing the following weaknesses: (i) misaligned incentives between originators and securitizers on the one hand, and borrowers and investors on the other, as the former did not share the risks of the latter; (ii) a lack of reliable information and transparency for borrowers because originators were not required to share certain information; (iii) excessive risk taking due to a loosening of underwriting standards prior to the financial crisis; and (iv) a lack of federal oversight (since addressed by Congress through the FHFA and CFPB). Finally, the report presents a nine-pronged evaluation framework for assessing potential changes to the housing finance system designed to help policymakers understand the strengths and weaknesses of competing goals and policies, to craft new proposals, and to understand the risks of transitioning to a new housing finance system.
OIG Audit Determines FHFA Should Direct The GSEs To Require Independent Assurance Of Counterparties’ Compliance
Recently, the FHFA Office of the Inspector General (OIG) concluded that the FHFA can further mitigate the risks posed by Fannie Mae’s and Freddie Mac’s reliance on third-party mortgage loan sellers and servicers (counterparties). The OIG recommended that the FHFA direct the two GSEs to assess a risk-based approach as to whether the counterparties should obtain independent, third-party attestations of their compliance with origination and servicing requirements, which would complement but not replace Fannie Mae’s and Freddie Mac’s own onsite reviews and other performance monitoring controls. The purpose of the recommendation was to increase assurance that the $4.8 trillion in GSE-owned and -guaranteed mortgages are appropriately originated and serviced. The recommendation came at the heels of an OIG audit of FHFA’s oversight over how the GSEs ensure that third party loan sellers and servicers comply with the GSEs’ requirements. The OIG’s recommendation was based on the finding that the GSEs currently rely on the counterparties’ self-representations of their compliance, and only a portion of loans purchased are subject to detailed quality reviews. Per the OIG’s recommendation, the attestations can be implemented in a manner that considers cost versus benefit based on a given counterparty’s size, complexity, performance, and other risk factors. The FHFA did not agree with the OIG recommendation, and the OIG is requesting that FHFA reconsider its disagreement with the recommendation.
Fannie Mae Authorizes Servicers To Waive Deficiency Judgment Rights, Announces Other Servicing Policy Updates
On September 8, Fannie Mae advised in Servicing Guide Announcement SVC-2014-16 that servicers now have discretion to waive Fannie Mae’s deficiency judgment rights if doing so will help resolve foreclosure delays based upon individual borrower circumstances. The new authorization is applicable to conventional mortgage loans only, and the announcement provides a table of actions a servicer must complete prior to approving a waiver of deficiency judgment rights. The announcement also introduced the Suspended Counterparty Program (SCP), stating that servicers must establish and maintain a procedure to ensure any individual or entity on the FHFA’s SCP list is not involved in activities related to the origination or servicing of mortgage loans owned by Fannie Mae, including the marketing, maintenance, or sale of Fannie Mae REO properties. The program is effective immediately. Fannie Mae also announced several other servicing policy clarifications and form updates.
On September 8, Fannie Mae published a fact sheet about borrower eligibility after a derogatory credit event. The fact sheet reviews Fannie Mae’s recently updated policy related to the minimum waiting periods following a bankruptcy, preforeclosure sale, or deed-in-lieu of foreclosure and provides sample borrower scenarios.
On August 26, Fannie Mae issued Selling Guide Announcement SEL-2014-11, which advises that Fannie Mae is retiring two standard Fannie Mae ARM plans—ARM Plan 1445 and ARM Plan 1446—because certain revisions to Regulation Z and the absence of any deliveries of loans under those ARM plans in recent years. The announcement also advises sellers that (i) the requirement to confirm that potential employees are not on the Suspended Counterparty Program list has been added to Fannie Mae’s requirements for lender hiring practices and to the procedures that third party originators must follow; (ii) Fannie Mae has amended the Guide to clarify that its policy with regard to requirements pertaining to lender review of disputed tradelines applies to manually underwritten loans; and (iii) Fannie Mae is clarifying the policy regarding the allowable age of credit documents to specify that when consecutive documents are in the loan file, the most recent document is used to determine the age.
On August 29, the FHFA released proposed affordable housing goals for Fannie and Freddie that would leave in place the benchmark requiring the government-owned mortgage companies finance 23% of their mortgages in low-income areas through 2017. The proposal also included new alternative measures for the affordable housing goals, including one that would evaluate Fannie and Freddie based on how much of their business is directed to low-income areas as compared to how much the overall mortgage market serves those same areas. For the first time, the proposed rule would set benchmarks applicable to financing small, multifamily rental properties that are affordable for low-income families. FHFA’s current affordable housing goals are effective through the end of 2014. Comments on the proposal are due by October 28, 2014.