GAO Publishes Report Regarding Proposed Changes To The Single-Family Housing Finance System

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.

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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.

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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.

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Fannie Mae Issues Fact Sheet on Prior Derogatory Credit Event Policies

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.

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Fannie Mae Announces Selling Guide Updates

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.

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FHFA Proposes Affordable Housing Goals for GSEs

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.

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FHFA Announces Settlement Of Litigation With Investment Bank

On August 22, the Federal Housing Finance Agency (FHFA) announced that it settled litigation with a major investment bank, other related companies, and several individuals over alleged violations of federal and state securities laws in connection with private-label mortgage-backed securities purchased by Fannie Mae and Freddie Mac between 2005 and 2007. In 2011, FHFA, as conservator for the two GSEs brought suit in the U.S. District Court of the Southern District of New York seeking relief for damages that allegedly resulted from a failure to adequately disclose risks related to the subject MBS offerings. Under the terms of the settlement, the bank is required to pay $3.15 billion to repurchase securities that were the subject of the claims in FHFA’s lawsuit. The difference between that amount and the securities’ current value is approximately $1.2 billion. According to FHFA, that difference is sufficient to effectively make the two GSEs whole on their investments. With this settlement, FHFA has resolved sixteen of the eighteen RMBS suits it filed in 2011. For details on those settlements, please see FHFA’s update on private-label securities suits. For specifics relating to how the August 22 settlement will impact each of the GSEs, please see the purchase and settlement agreements with Fannie Mae and Freddie Mac.

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Fannie Mae Issues Lender Letter On Mortgage Loan Requirements

On August 25, Fannie Mae issued Lender Letter LL-2014-04, which reminds lenders that when a mortgage loan is selected by Fannie Mae for an anti-predatory and HOEPA compliance review, the lender must provide requested loan information to Fannie Mae. Further, the letter reminds sellers that mortgage loans with either an annual percentage rate or total points and fees payable by the borrower that exceed the applicable HOEPA thresholds are not eligible for delivery to Fannie Mae. Additionally, Fannie Mae released an optional worksheet, available on the Fannie Mae website, designed to assist lenders in responding to any information requests from Fannie Mae. This letter highlights the continued focus of Fannie Mae regarding its anti-predatory lending quality control process.

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FHFA Seeks Comments On Proposed Single GSE Security

On August 12, the FHFA requested comments on the structure of a proposed single security that would be issued and guaranteed by Fannie Mae or Freddie Mac (the GSEs). The implementation of the single security would be part of a “multi-year initiative” to build a common securitization platform. The request explains that the proposed single security would generally encompass many of the pooling features of the current Fannie Mae Mortgage Backed Security (MBS) and most of the disclosure framework of the current Freddie Mac Participation Certificate (PC). The single security would have key features that exist in the current market, such as: (i) a payment delay of 55 days; (ii) pooling prefixes; (iii) mortgage coupon pooling requirements; (iv) minimum pool submission amounts; (v) general loan requirements, such as first lien position, good title, and non-delinquent status; (vi) seasoning requirements; and (vii) loan repurchase, substitution, and removal guidelines. The GSEs would continue to maintain their separate Servicing and Selling Guides for the single security. The FHFA is especially interested in comments on how to preserve “to-be-announced” (TBA) eligibility and ensure that legacy MBS and PCs are “fully fungible” with the single security. The FHFA also seeks specific input on: (i) what key factors regarding TBA eligibility status should be considered in the design of and transition to a single security; (ii) what issues should be considered to ensure broad market liquidity for the legacy securities; (iii) what operational, system, policy, or other effects on the industry should be considered; and (iv) what can be done to ensure smooth implementation of a single security with minimal risk of market disruption. Comments are due by October 13, 2014.

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SDNY Orders Bank To Pay $1.3 Billion Following Verdict In GSE Civil Fraud Case

On July 30, the U.S. District Court for the Southern District of New York ordered a bank to pay a nearly $1.3 billion civil penalty after a jury found the bank liable in October 2013 on one civil mortgage fraud charge arising out of a program operated by a mortgage lender the bank had acquired. The case was the first in which the government alleged violations of FIRREA in connection with loans sold to Fannie Mae and Freddie Mac. The government originally sought damages of $1 billion based on alleged losses incurred by Fannie Mae and Freddie Mac. Subsequently the government argued the penalty should be calculated not based on loss to the GSEs, but rather based on gross gain to the lender, in order to accomplish “FIRREA’s central purpose of punishment and deterrence.” The government calculated a gross gain of $2.1 billion, and requested that the court impose a penalty in that amount.

In its order on civil penalties, the court noted that FIRREA provides no guidance on how to calculate a gain or loss or how to choose a penalty within the broad range permitted. To quantify the gain or loss on the 17,611 loans at issue, the court focused on the general principle that the “civil penalty provisions of FIRREA are designed to serve punitive and deterrent purposes and should be construed in favor of those purposes.” The court determined that both gain and loss should be viewed in terms of how much money the lender “fraudulently induced” the GSEs to pay. Even though many of the loans were in fact high quality, the Court included all of the loans in the gain and loss analysis because the jury found that the lender engaged in an intentional scheme to defraud the GSEs and that the lender intended to represent loans as being materially higher quality than they actually were. The court reasoned that the “happenstance that some of the loans may still have been of high quality should not relieve the defendants of bearing responsibility for the full payments they received from the scheme, at least not if the purposes of the penalty are punishment and deterrence.” As a result, the Court found the proper measure of both gain and loss to be the amount Fannie and Freddie paid for all loans at issue, and set $2,960,737,608 as the statutory maximum for the penalty. As a compensating factor, the court considered that 57.19 percent of the loans were not materially defective and reduced the penalty to 42.81 percent of the statutory maximum, or $1,267,491,770.

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Fannie Mae Reminds Servicers Of Adverse Action Notice Requirements

On July 30, Fannie Mae issued a servicing notice to remind servicers of requirements pertaining to Adverse Action Notices. The notice states that Fannie Mae requires a servicer to send an Adverse Action Notice to a borrower within 30 days after Fannie Mae advises the servicer through HomeSaver Solutions Network (HSSN) of the declination of the modification request if: (i) the servicer submitted the request to Fannie Mae through HSSN for a mortgage loan modification decision; and (ii)  the borrower was current on the date that Fannie Mae advised the servicer that Fannie Mae declined the mortgage loan modification request. In such cases, the servicer must: (i) maintain a copy of the Adverse Action Notice in the mortgage loan servicing file; and (ii) provide Fannie Mae a copy of the Adverse Action Notice the servicer sends to the borrower by uploading it to HSSN. At a minimum, if the servicer elects to use its own Adverse Action Notice as opposed to the Fannie Mae-provided form, it must: (i) inform the borrower that Fannie Mae as the owner of the mortgage loan reviewed the mortgage loan modification request; (ii) provide Fannie Mae’s contact address; (iii) provide the reason Fannie Mae did not approve the request, in addition to the reason the servicer did not approve the request; and (iv) identify the credit reporting agency and contact information, if applicable. The notice also alerts servicers of updates to the Allowable Foreclosure Attorney Fees Exhibit, Evaluation Model Clauses, and the Master Custodial Agreement (Form 2003).

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Fannie Mae Updates Fraud Notice Requirements, Policies Regarding Significant Derogatory Credit Events, Other Selling Topics

On July 29, Fannie Mae issued Selling Guide Announcement SEL-2014-10, which includes updates and clarifications regarding numerous selling topics. The announcement states that the long-standing requirement that a lender must notify Fannie Mae immediately if it learns of any misrepresentation, breach of selling warranty, or fraud is being updated to clarify Fannie Mae’s expectation that the lender perform due diligence to establish a reasonable belief that a misrepresentation, breach of selling warranty, or fraud may have occurred prior to making the self-report to Fannie Mae. Several other changes in the announcement relate to significant derogatory credit events, and many of them were previously announced in the Desktop Originator/Underwriter Release Notes. These changes relate to, among other things, waiting periods related to: (i) mortgage debt discharged through bankruptcy; (ii) a preforclosure sale or deed-in-lieu of a foreclosure; and (iii) charge off accounts. In addition, the announcement (i) provides a table of policy updates and clarifications regarding lender quality control processes; (ii) describes changes to the MBS buyup and buydown ratio grids; and (iii) updates property insurance requirements for condos, co-ops, and PUDs.

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FHFA OIG Assesses Risks From Smaller Lenders And Nonbank Mortgage Companies

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.

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Fannie Mae, Freddie Mac Publish Additional Uniform Closing Dataset Documentation

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.

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Mortgage Company Resolves HAMP-Related Criminal Allegations

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.

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