On February 20, FinCEN finalized a rule that will require Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (the GSEs) to develop AML programs and to file SARs directly with FinCEN. Under the current system, the GSEs file fraud reports with the FHFA, which then files SARs with FinCEN when warranted under FinCEN’s reporting standards. The new regulations are substantially similar to the version proposed in November 2011, and are intended to streamline the reporting process and provide more timely access to data about potential fraud. The AML provisions of the new regulations implement the BSA’s four minimum requirements: (i) the development of internal policies, procedures, and controls; (ii) the designation of a compliance officer; (iii) an ongoing employee training program; and (iv) an independent audit function to test programs. The SAR regulation requires reporting of suspicious activity in accordance with standards and procedures contained in all of FinCEN’s SAR regulations. In addition, under the streamlined system, the GSEs and their directors, officers, and employees will qualify for the BSA’s “safe harbor” provisions, which are intended to encourage covered institutions to report suspicious activities without fear of liability. The final rule does not require the GSEs to comply with any other BSA reporting or recordkeeping regulations, such as currency transaction reporting. The rule takes effect 60 days after publication in the Federal Register and the GSEs will have 180 days from publication to comply.
On February 26, Fannie Mae issued Servicing Guide Announcement SVC-2014-04, which states that a servicer must retain in the mortgage loan servicing file all supporting documentation for all expense reimbursement claims, in addition to other servicing and liquidation information. A servicer must document its compliance with all Fannie Mae policies and procedures, including but not limited to, timelines that are required in the Servicing Guide, and must maintain in the individual mortgage loan file all documents and system records that preserve Fannie Mae’s ownership interest in the individual mortgage loan. The Announcement also (i) clarifies that when Fannie Mae requests a mortgage loan servicing file for a quality control review, the servicer must include supporting documents for all expense reimbursement claims it has submitted or intends to submit to Fannie Mae; (ii) states that a servicer must submit the final Cash Disbursement Request (Form 571) within 30 days after completion of a loss mitigation alternative, filing a mortgage insurance claim for a property that will be conveyed to the insurer or guarantor, acquisition of a property by a third party at a foreclosure sale, or disposition of an acquired property; (iii) provides examples of information sufficient to support a servicer’s attorney expense reimbursement request; and (iv) clarifies that when a servicer transfers its contractual right to service some or all of its Fannie Mae single-family servicing to another Fannie Mae-approved servicer, any variance or waiver granted to a transferor servicer does not automatically transfer to the transferee servicer, and the transferor and transferee servicers must ensure that all existing special servicing obligations associated with the transferred mortgage loan are disclosed. Finally, in a separate notice, Fannie Mae announced that it may adjust the Fannie Mae Standard Modification Interest rate for Fannie Mae Standard or Streamlined Modifications on a monthly basis, beginning July 1, 2014.
On February 12, the FHFA Office of Inspector General (OIG) issued a report on the FHFA’s oversight of Fannie Mae’s and Freddie Mac’s handling of aged repurchase demands. The OIG found that (i) the FHFA’s published guidance for aged repurchase demands essentially let each of Fannie Mae and Freddie Mac establish its own model for penalizing seller-servicers; (ii) Freddie Mac continued to employ its existing right to assess late fees on seller-servicers for not resolving repurchase demands timely, which resulted in missed assessments of up to $284 million due in large part to inconsistently waving, enforcing, and excepting late fees; and (iii) Fannie Mae continued without an ability to assess repurchase late fees, claiming a $5.4 million cost to establish the program necessary to do so was prohibitive, but failing to realize the potential benefits from a continuous stream of penalty fees. The OIG recommended that the FHFA (i) promptly quantify the potential benefit of implementing a repurchase late fee program at Fannie Mae, and then determine whether the potential cost outweighs the potential benefit; (ii) direct Freddie Mac to develop an expanded repurchase late fee report that would provide Freddie Mac and FHFA management with needed information to manage and assess Freddie Mac’s repurchase late fee program more effectively; and (iii) direct Freddie Mac to provide the FHFA with information on any assessed but uncollected late fees associated with the repurchase claims so that such fees can be considered in repurchase settlement negotiations and documented in accordance with the Office of Conservatorship Operations’ Settlement Policy.
On January 27, the U.S. Court of Appeals for the Fourth Circuit upheld a district court decision and held that Fannie Mae and Freddie Mac are exempt from state and local real estate transfer taxes. Montgomery County, Md. v. Fed. Nat. Mortg. Ass’n, No.13-1691/1752, 2014 WL 279852 (4th Cir. Jan. 27, 2014). In this case, as in other similar cases around the country, Maryland and South Carolina counties sued to recover state and local real estate transfer taxes from Fannie Mae, Freddie Mac, and FHFA for property transfers made by those entities. The court held that Congress expressly exempted Fannie Mae and Freddie Mac from “all taxation,” including all state and local taxation, when it chartered those institutions and, in a footnote, explained that, as conservator stepping into the shoes of Fannie Mae and Freddie Mac, the same exemption applies to FHFA. The court rejected the counties’ argument that the state and local taxes imposed on transfer and recordation of real property fell within the real property tax exclusions from the general tax exemption provision of Fannie Mae and Freddie Mac’s respective charters. The court added that Congress specifically carved out real property taxes from the “all taxation” exemption, but that the types of transfer taxes at issue in this case were distinguishable from a real property tax. The court affirmed the district court’s judgment in favor of Fannie Mae, Freddie Mac, and FHFA.
On January 29, the DOJ filed a supplemental brief in support of its claim for civil penalties following a jury verdict it obtained last October in the first case alleging violations of FIRREA in connection with loans sold to Fannie Mae and Freddie Mac. U.S. v. Countrywide Fin. Corp., No. 12-CV-1422 (S.D.N.Y. Jan. 28, 2014). In October, following a four week trial, a jury found a bank liable under FIRREA based on a program operated by a lender that the bank had acquired. The government originally sought damages of $864 million based on alleged losses incurred by Fannie Mae and Freddie Mac. After the judge requested supplemental briefing from the parties focused on the alleged gain rather than loss, the government submitted a brief arguing that the gain was $2.1 billion, and requesting that the court impose a penalty in that amount. The government asserts that the penalty should be calculated using gross gain, rather than net gain, to accomplish “FIRREA’s central purpose of punishment and deterrence.”
On January 24, Fannie Mae issued Servicing Guide Announcements SVC-2014-01 and SVC-2014-02, and on January 29 issued SVC-2014-03. Effective April 1, 2014, the first announcement revises Fannie Mae’s requirements for borrower notification of the interest rate adjustment for a mortgage loan that has been modified and is subject to step interest rate adjustments, including Fannie Mae HAMP modifications. SVC-2014-02 updates Fannie Mae policies regarding (i) refunding overcharges for special adjustable-rate mortgage loans; (ii) bankruptcy schedules of assets and liabilities; (iii) foreclosure prevention opportunities; and (iv) third-party sales proceeds. For example, effective May 1, 2014, when an adjustable-rate mortgage loan error is identified, servicers are no longer required to contact Fannie Mae to determine if foreclosure proceedings should be discontinued or stayed, regardless of the stage of delinquency, including cases where the loan has been referred for foreclosure and the application of any payment as a result of corrections reduces the delinquency. The servicer must establish its own procedures to ensure compliance with Fannie Mae’s requirements regarding the correction of adjustment errors for all mortgage loans serviced for Fannie Mae. Through SVC-2014-03, Fannie Mae increased the repayment plan incentive fee to $500 for each new and existing repayment plan that meets Fannie Mae’s criteria and that successfully brings a mortgage loan current. The increased repayment plan incentive amount will be effective for each repayment plan that meets Fannie Mae’s criteria and successfully brings the mortgage loan current on or after March 1, 2014. Fannie Mae is also adjusting servicer incentives on short sales and Mortgage Releases.
On January 9, Representatives Ed Royce (R-CA), Jim Himes (D-CT), Spencer Bachus (R-AL), and Carolyn Maloney (D-NY) petitioned FHFA Director Mel Watt to expeditiously direct Fannie Mae and Freddie Mac to revise their seller/servicer guidelines to permit the use of credit scores from alternative credit score providers, so long as the scores are “empirically derived and demonstrably and statistically sound.” The lawmakers argue that a move to permit the use of scores other than those offered by FICO would “remove an unfair barrier to entry in the mortgage market” and “encourage the development of more predictive credit scores.”
Over the past week, Fannie Mae has announced numerous servicing policy changes through a series of Servicing Guide Announcements. In SVC-2013-25, Fannie Mae updated allowable bankruptcy attorney and foreclosure attorney fees, as well as requirements for reimbursement of postage costs in connection with bankruptcies and foreclosures. SVC-2013-26 announced that servicers are no longer required to refer deed-in-lieu of foreclosure offers for Home Equity Conversion Mortgages (HECMs) to Fannie Mae for approval. Through SVC-2013-27, Fannie Mae updated its requirements for lender-placed insurance, including by (i) requiring that lender-placed insurance premiums charged to the borrower or reimbursed by Fannie Mae must exclude any lender-placed insurance commissions or payments earned by the servicer, broker, or any affiliated entity; (ii) requiring that a servicer’s carrier for a lender-placed insurance policy for a Fannie Mae mortgage loan must not be an affiliated entity of the servicer, which includes any captive insurance or reinsurance arrangements with an affiliated entity; and (iii) adding a new lender-placed insurance compliance certification. In SVC-2013-28, Fannie Mae expanded its standard and streamlined modification programs to include loans with a pre-modified mark-to-market loan-to-value ratio less than 80 percent. The announcement details steps servicers must take in order to determine the terms of a modified mortgage loan and ensure satisfaction of eligibility requirements. The announcement also establishes evaluation notice, solicitation letter, and trial period plan requirements for certain modifications. Finally, Fannie Mae issued SVC-2013-29 to announce that (i) all mortgage loans a master servicer transfers from one subservicer to another, from the master servicer to a subservicer, or from the subservicer to the master servicer, must obtain Fannie Mae’s prior written consent; and (ii) as part of the transfer of servicing review, Fannie Mae will evaluate the performance and capacity of any subservicer the transferee servicer elects to utilize.
On December 16, the FHFA requested public comment on a plan gradually to reduce the maximum size of loans purchased by Fannie Mae and Freddie Mac. The FHFA bases the plan on the uncertain future of Fannie Mae and Freddie Mac and “the desire for private capital to re-enter the market.” The FHFA states that it is considering starting the gradual decrease with approximately a four percent reduction in the maximum loan limit for one-unit properties—for example, from $417,000 to $400,000 in most locations, and from $625,000 to $600,000 for the highest-cost areas. The lower purchase limits would, at the earliest, apply to loans originated after October 1, 2014. The FHFA seeks specific comments on (i) the appropriate advance notice period for any final changes; (ii) the timing of any subsequent adjustments; (iii) whether any such subsequent adjustments should be announced in a multi-year schedule, and, if so, whether they should be based on specific dollar amount reductions or percent changes per year; (iv) whether reductions to the limit for areas that fall between the baseline limit and the high-cost limit should continue to be tied to median house prices or should be proportional to reductions in the baseline limit; and (v) whether loan limits should be set at even multiples of either $1,000 or some other dollar amount. Comments are due no later than March 20, 2014.
On December 16, Fannie Mae issued Selling Guide Announcement SEL-2013-09 and Freddie Mac issued Bulletin 2013-26 to implement new guarantee fees (g-fees) for 2014, as recently mandated by the FHFA. The announcements provide updated up-front g-fee grids, which the FHFA claims are needed to better align pricing with the credit risk characteristics of the borrower.
On December 9, the FHFA directed Fannie Mae and Freddie Mac to raise guarantee fees (g-fees). Under the directive, Fannie Mae and Freddie Mac will increase the base g-fee (or ongoing g-fee) for all mortgages by 10 basis points, and will update the up-front g-fee grid to better align pricing with the credit risk characteristics of the borrower. In addition, the up-front 25 basis point adverse market fee that has been assessed on all mortgages purchased by Freddie Mac and Fannie Mae since 2008 will be eliminated except in four states. As described in the FHFA’s State-Level Guarantee Fee Analysis, mortgages newly acquired by Fannie Mae and Freddie Mac that are originated in states that have expected carrying costs more than two standard deviations above the national average, will be charged an additional upfront guarantee fee of 25 basis points. The affected states include New York, New Jersey, Connecticut, and Florida. The FHFA originally proposed charging fees on mortgages originated in all states over one standard deviation, which would have covered the four listed, plus Illinois. The new g-fees will apply to (i) all loans exchanged for mortgage-backed securities with settlements starting April 1, 2014, and (ii) all loans sold for cash with commitments starting March 1, 2014.
FHFA Holds Conforming Loan Limits Steady, Announces Overhauled Mortgage Insurance Master Policy Requirements
On November 26, FHFA announced that 2014 maximum conforming loan limits will remain at $417,000, unchanged from 2013. On December 2, FHFA announced that Fannie Mae and Freddie Mac soon will provide guidance to lenders and servicers regarding specific effective dates for new requirements under the entities’ aligned, overhauled mortgage insurance master policies, which guidance will include changes related to loss mitigation, claims, assurance of coverage, and information sharing. FHFA, Fannie Mae, and Freddie Mac anticipate that the master policies will go into effect in 2014, pending review and approval by state insurance regulators.
On November 25, Freddie Mac issued Bulletin 2013-24 and Fannie Mae issued Servicing Guide Announcement SVC-2013-23, which revised numerous short sale and deed-in-lieu of foreclosure (DIL) requirements. The enterprises updated, among other things, eligibility requirements for exceptions to borrower documentation for short sales and DILs by (i) permitting a borrower whose mortgage debt has been discharged in a Chapter 7 bankruptcy to be eligible for an exception to documentation, regardless of FICO score; and (ii) removing mortgages that were originated as investment properties from eligibility for an exception to documentation. The enterprises also required servicers to: (i) submit a short sale or DIL recommendation for approval when the borrower’s cash reserves exceed $50,000; and (ii) delay, or ensure that foreclosure counsel delays, the next legal action in the foreclosure process when such servicers receive a first complete borrower response package (BRP) more than 37 days prior to a scheduled foreclosure sale date, and the evaluation results in an offer to proceed with a short sale or DIL. Finally, the enterprises revised the timeframes within which servicers are required to conduct an expedited review of a completed BRP and updated requirements relating to borrower appeals.
On December 4, Fannie Mae issued Servicing Guide Announcement SVC-2013-24, which: (i) updates the modification terms for the “Cap and Extend Modification for Disaster Relief” to require servicers to set the interest rate to a fixed rate; and (ii) establishes the steps servicers must follow to determine borrowers’ modified payment terms. Fannie Mae encourages servicers to implement the new requirements immediately, but will not require them to do so until February 1, 2014. The announcement likewise requires, with immediate effect, that servicers update Form 582 (Lender Record Information) promptly after any change in previously-submitted information occurs. Finally, the announcement adds to the Servicing Guide glossary a definition for “seriously delinquent mortgage loan.”
On November 20, the FHFA Office of Inspector General (OIG) issued a report critical of Fannie Mae’s oversight of its short sale process and the servicers who participate in that process. The OIG determined—based on a review of 41 short sale transactions handled by multiple Fannie Mae servicers—that five servicers were not always collecting all of the required documentation before making borrower eligibility determinations or seeking Fannie Mae approval. The report states also that servicers sometimes failed to conduct adequate reviews supporting borrower eligibility determinations. Further, the OIG found that borrowers with potentially significant financial resources sold multiple non-owner occupied properties through Fannie Mae’s streamlined documentation program, which allows servicers to approve short sales based only on low FICO scores and delinquency status. The OIG recommends that Fannie Mae strengthen its oversight of the short sale program by (i) enforcing the requirement that all borrowers outside the streamlined documentation program provide a borrower-certified borrower assistance form; (ii) establishing controls to identify and resolve inconsistencies between the borrower assistance form and supporting documentation; (iii) considering whether its servicer compensation structure should include the quality of borrower eligibility determinations for short sales and success in limiting losses; and (iv) enhancing controls over collection and use of electronic information from servicers on the financial condition of borrowers. The OIG also suggests that the FHFA should: (i) determine whether the streamlined documentation program should be available to borrowers seeking approval to short sell non-owner occupied properties; and (ii) provide examination coverage of Fannie Mae’s short sale activities with particular emphasis on identifying systemic deficiencies related to borrower submissions, Fannie Mae eligibility determinations, servicer compensation structure, and reliability of electronic information used in managing short sales.