On July 15, Fannie Mae and Freddie Mac announced the availability of additional documentation to support the mortgage industry with the implementation of the Uniform Closing Dataset (UCD), the common industry dataset that supports the CFPB’s closing disclosure. The documents provide information to supplement the MISMO mapping document released in March 2014. Fannie Mae and Freddie Mac intend to collect the UCD from lenders in the future, but have not yet determined the method or timeline for that data collection.
On July 17, the FHFA Office of Inspector General (OIG) published a report on risks to Fannie Mae and Freddie Mac (the Enterprises) related to purchasing mortgages from smaller lenders and nonbank mortgage companies. The report states such lenders present elevated risk in the following areas: (i) counterparty credit risk—smaller lenders and nonbank lenders may have relatively limited financial capacity, and the latter are not subject to federal safety and soundness oversight; (ii) operational risk—smaller or nonbank lenders may lack the sophisticated systems and expertise necessary to manage high volumes of mortgage sales to the Enterprises; and (iii) reputational risk—the report cites as an example an institution that was sanctioned by state regulators for engaging in allegedly abusive lending practices. The report notes that in 2014 the FHFA’s Division of Enterprise Regulation’s plans to focus on Fannie Mae’s and Freddie Mac’s controls for smaller and nonbank sellers, which will include assessments of the Enterprise’s mortgage loan delivery limits and lender eligibility standards and assessment of the counterparty approval process and counterparty credit risk resulting from cash window originations. The report also notes FHFA guidance to the Enterprises last year on contingency planning for high-risk or high-volume counterparties, and states that the FHFA plans to issue additional guidance on counterparty risk management. Specifically, the Division of Supervision Policy and Support plans to issue an advisory bulletin focusing on risk management and the approval process for seller counterparties. The OIG did not make any recommendations to supplement the FHFA’s planned activities.
On July 3, the DOJ announced the resolution of a multi-agency criminal investigation into the way a large mortgage company administered the federal Home Affordable Modification Program (HAMP). According to a Restitution and Remediation Agreement released by the company’s parent bank, the company agreed to pay up to $320 million to resolve allegations that it made misrepresentations and omissions about (i) how long it would take to make HAMP qualification decisions; (ii) the duration of HAMP trial periods; and (iii) how borrowers would be treated during those trial periods. In exchange for the monetary payments and other corrective actions by the company, the government agreed not to prosecute the company for crimes related to the alleged conduct. The investigation was conducted by the U.S. Attorney for the Western District of Virginia, as well as the FHFA Inspector General—which has authority to oversee Fannie Mae’s and Freddie Mac’s HAMP programs—and the Special Inspector General for TARP—which has responsibility for the Treasury Department HAMP program and jurisdiction over financial institutions that received TARP funds. This criminal action comes in the wake of a DOJ Inspector General report that was critical of the Justice Department’s mortgage fraud enforcement efforts, and which numerous members of Congress used to push DOJ to more vigorously pursue alleged mortgage-related violations. In announcing the action, the U.S. Attorney acknowledged that other HAMP-related investigations are under way, and that more cases may be coming.
On July 1, the U.S. Attorney for the Southern District of New York announced that a large bank agreed to pay $10 million to resolve allegations that prior to 2011 it violated the False Claims Act and FIRREA by failing to oversee the reasonableness of foreclosure-related charges it submitted to the FHA and Fannie Mae for reimbursement, contrary to program requirements and the bank’s certifications that it had done so. The government intervened in a whistleblower suit claiming that, notwithstanding FHA program requirements and the bank’s annual FHA certifications, prior to 2011, the bank failed to create or maintain an adequate FHA quality control program to review the fees and charges submitted by outside counsel and other third-party providers to the bank, which the bank then submitted to FHA for reimbursement. The government also claimed that the bank failed to create or maintain Fannie Mae audit and control systems sufficient to ensure that the fees and expenses submitted by outside counsel and other third-party providers to the bank, which the bank then submitted to Fannie Mae for reimbursement, were reasonable, customary, or necessary. In addition to the monetary settlement, the bank was required to admit to the allegations and agreed to remain compliant with all rules applicable to servicers of mortgage loans insured by FHA and to servicers of loans held or securitized by Fannie Mae and Freddie Mac.
On July 1, the FHFA Office of Inspector General (OIG) issued a report containing its assessment of FHFA controls to ensure that Fannie Mae and Freddie Mac monitor nonbank special servicer performance and mitigate related risks. The report concluded that the FHFA has not established a risk management process to handle risks resulting from specialty servicers’ (i) use of short-term financing to buy servicing rights for troubled mortgage loans that may only begin to pay out after long-term work to resolve their difficulties; and (ii) obtaining large volumes of mortgage loans that may be beyond what their infrastructures can handle. The OIG asserted that such risks “are amplified by nonbank special servicers operating without the same standards and regulation as banks that service mortgage loans,” including capital requirements, which the OIG believes makes nonbank servicers “more susceptible to economic downturns” that could “substantially increase nonperforming loans that require servicer loss mitigation while at the same time impact[ing] the ability of the servicer to perform.” The OIG recommended that the FHFA (i) issue guidance on a risk management process for nonbank special servicers and (ii) develop a comprehensive, formal oversight framework to examine and mitigate the risks these nonbank special servicers pose. The report highlighted recent FHFA guidance that the OIG believes is sufficient to resolve the second recommendation—a June 11, 2014 FHFA Advisory Bulletin outlining supervisory expectations for risk management practices in conjunction with the sale and transfer of mortgage servicing rights or the transfer of the operational responsibilities of servicing mortgage loans owned or guaranteed by Fannie Mae and Freddie Mac. The Bulletin requires Fannie Mae and Freddie Mac to consider servicer capacity, including staffing, facilities, information technology systems, and any sub-servicing arrangements, as part of the analysis of mortgage servicing transfers. The FHFA agreed to also develop supervisory guidance on how Fannie Mae and Freddie Mac manage risks associated with servicing troubled loans.
On July 10, the FHFA sought input on a proposal to establish new eligibility requirements for private mortgage insurers seeking to insure Fannie Mae and Freddie Mac (the Enterprises) mortgages. As described in an overview document, the FHFA proposes to revise business requirements to identify, measure, and manage exposure to counterparty risk. The FHFA also proposes new financial requirements and minimum quality control program requirements, which it states are intended to (i) facilitate an insurer’s monitoring of adherence to its underwriting and eligibility guidelines; (ii) ensure data accuracy; and (iii) prevent the insuring of fraudulent mortgages or mortgages with other defects. An insurer would be required to submit to each Enterprise a copy of its quality control program annually, with changes noted from the prior year’s version. The proposal also describes numerous potential remedies available to the Enterprises should an insurer fail to meet its requirements, ranging from more frequent dialogue or visits with an insurer to suspension or termination. All components of the requirements would become effective 180 days after the publication date of the finalized requirements. During the input period, and until the requirements are finalized, any insurer already approved to do business with the Enterprises that does not fully meet each Enterprise’s existing eligibility requirements would continue to operate in its current status and would be given a transition period of up to two years from the publication date to fully comply. Comments on the proposal are due by September 8, 2014.
Fannie Mae Offers Alternative To Repurchase For Mortgage Insurance Rescission, Announces Numerous Other Servicing Policy Updates
On July 1, Fannie Mae issued Servicing Guide Announcement SVC-2014-13, which describes a new alternative to repurchase, an “MI stand-in.” The MI stand-in is defined as the full mortgage insurance (MI) benefit that would have been payable under the original mortgage insurance policy if the mortgage loan liquidates. The alternative was first announced earlier this year as part of broader updates to Fannie Mae’ representation and warranties framework. Fannie Mae will not require immediate repurchase when the MI is rescinded on mortgage loans acquired on or after July 1, 2014, and instead will offer the MI stand-in if: (i) the responsible party meets Fannie Mae’s eligibility criteria; and (ii) the only defect Fannie Mae identifies in the mortgage loan is the rescission of MI; or (iii) the responsible party cures all defects identified, except the MI rescission defect, during the required cure period. A mortgage loan will not be eligible for the MI stand-in if: (i) Fannie Mae identifies other defects during the full file quality control review which the responsible party fails to cure during the required cure period, or (ii) the responsible party does not respond in a timely manner or submit all of the required documents within the timeframes required by Fannie Mae. If the responsible party cures the defects that made the mortgage loan ineligible for the MI stand-in, Fannie Mae will review the mortgage loan and responsible party for this alternative to repurchase. On July 9, in Servicing Guide Announcement SVC-2014-14, Fannie Mae announced that servicemembers can use alternatives to Fannie Mae’s form for documenting active duty orders. The announcement also updates policies regarding (i) ordering a property valuation for short sales, Mortgage Releases, and foreclosure sale bidding instructions; (ii) submitting financial statements and reports; and (iii) loan modification monthly principal and interest payment requirements.
On July 1,Fannie Mae issued Selling Guide Announcement SEL-2014-09 to remind lenders and originators—as it recently did for servicers—of their obligations to be in compliance with applicable provisions of the Bank Secrecy Act and its implementing regulations and to have internal policies, procedures, and controls in place to identify suspicious activities.
On June 25, the FHFA Office of Inspector General (OIG) published a report that urges the FHFA to consider whether to pursue servicers and insurers for alleged lender-placed insurance (LPI) losses. The OIG cited prior determinations by state insurance regulators that LPI rates in their respective jurisdictions allegedly were excessive and that those rates may have been driven up by profit-sharing arrangements under which servicers allegedly were paid to steer business to LPI providers. The OIG believes that Fannie Mae and Freddie Mac “have suffered considerable financial harm in the LPI market.” The OIG explained that using a methodology similar to that utilized by a state insurance regulator, it estimates that for 2012 alone the combined financial harm due to “excessively priced LPI” amounted to $158 million. The OIG acknowledged that its assessments did not consider compensation already received by Fannie Mae or Freddie Mac from repurchase requests. The report also notes that the FHFA has yet to complete an assessment regarding the merits of potential litigation to recover alleged financial damages associated with the LPI market, but recommends that the FHFA do so and take appropriate action in response. In its response to the report, the FHFA concurred and pledged to complete the review in the next 12 months. The FHFA also pointed out that its litigation assessment would differ from the review conducted by the OIG and would consider potential legal arguments and litigation risks, economic assessments, and relevant public policies.
On June 20, Fannie Mae issued Servicing Guide Announcement SVC-2014-11, which reminds servicers that under a recent FinCEN rule, Fannie Mae is considered a financial institution subject to BSA requirements. The announcement advises servicers subject to the AML provisions of the BSA that they are obligated to be in compliance with the BSA, and to report to Fannie Mae: (i) all instances of noncompliance, compliance failures, or sanctions related to BSA/AML requirements; (ii) suspicious activity related to Fannie Mae loans or business activities; and (iii) changes in ownership interest. Servicers may implement these requirements immediately, but are required to do so no later than August 25, 2014.
Recently, Fannie Mae (Servicing Guide Announcement SVC-2014-12) and Freddie Mac (Bulletin 2014-11) introduced a temporary modification option targeted to borrowers located in Detroit, Michigan as part of the FHFA-directed Neighborhood Stabilization Initiative. The announcements provide the borrower, property, and mortgage eligibility requirements, borrower documentation requirements, and other program details. The announcements also establish requirements for servicers to process the new modification options, which servicers must implement for all evaluations conducted on or after September 1, 2014.
On June 5, the FHFA issued a request for input regarding its proposed increases to guarantee fees (g-fees) that Fannie Mae and Freddie Mac charge lenders. Earlier this year, FHFA Director Mel Watt halted g-fee changes announced by the agency under Mr. Watt’s predecessor. Those changes would have (i) raised the base g-fee for all mortgages by 10 basis points; (ii) adjusted up-front fees charged to borrowers in different risk categories; and (iii) suspended the up-front 25 basis point adverse market fee in all but four states. The FHFA now poses more than a dozen questions for commenters to consider and respond to as the FHFA assesses future policies regarding g-fees. Comments are due by August 4, 2014.
On June 2, Massachusetts Attorney General (AG) Martha Coakley filed a lawsuit against the FHFA, Fannie Mae, and Freddie Mac for allegedly violating the state’s 2012 foreclosure prevention law, which, among other things, prohibits creditors from blocking home sales to non-profits that intend to resell the property back to the former homeowner. The AG claims that the FHFA has refused to require Fannie Mae and Freddie Mac to comply with the law, and as a result the companies’ “arm’s length transaction” policies, under which the parties proposing to purchase a property must attest that there are no agreements that the borrower will remain in the property as a tenant or later obtain title or ownership, restrict the sale of properties in violation of the law. In addition to the alleged violation of the foreclosure prevention law, the AG claims that by illegally applying the arm’s length transaction policies, the companies engaged in unfair or deceptive acts or practices. The AG seeks an order enjoining the companies from applying policies in violation of the foreclosure law, and penalties of up to $5,000 for each unfair or deceptive act or practice. The AG recently notified the FHFA of the potential suit in a letter that also renewed the AG’s calls for the FHFA to allow Fannie Mae and Freddie Mac to include principal reductions as part of their loan modification alternatives.
On June 4, Fannie Mae issued Servicing Guide Announcement SVC-2014-10, which updates policies related to unemployment forbearance. The announcement states that, effective immediately, a servicer may approve a borrower for the initial unemployment forbearance program provided that (i) the borrower’s mortgage payment is in imminent default or the mortgage loan delinquency is less than or equal to 12 months as of the evaluation date; and (ii) all other applicable eligibility requirements are met. In addition servicers are authorized to approve a compliant unemployment forbearance extension without approval from Fannie Mae. If the loan does not meet the eligibility requirements and the servicer believes, based on the borrower’s circumstances, that unemployment forbearance is appropriate, the servicer must submit a recommendation for approval. The initial unemployment forbearance period that may be offered is the lesser of six months or upon notification from the borrower of employment.
On May 27, Fannie Mae announced in Selling Guide Announcement SEL-2014-06 numerous selling policy updates. The announcement includes changes to Fannie Mae policies related to cash-out refinance transactions to provide additional flexibility and clarity with regard to delayed finance, continuity of obligation, and multiple finance properties for the same borrower. The announcement also details several asset-related updates, including, for example, that Fannie Mae will no longer require documentation for any deposit on a borrower’s recent bank statement that exceeds 25% of the total monthly qualifying income for the loan. Instead, Fannie Mae is changing the definition of a large deposit to 50% of the total monthly qualifying income, and states that when a deposit includes both sourced and unsourced portions, only the unsourced portion must be used when calculating whether the deposit meets the 50% definition. Fannie Mae also announced: (i) updates to the definitions for retail, broker, and correspondent origination types; (ii) clarification of the requirements for use of a power of attorney; and (iii) revised requirements for reporting lender financial statements.