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.
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.
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.
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.
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).
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.
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 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 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.