On April 3, the U.S. District Court for the Northern District of Illinois approved an order of dismissal and memorandum of understanding jointly entered by the FHFA and the City of Chicago to end more than two years of litigation over a city ordinance that requires mortgagees to register vacant properties and pay a $500 registration fee per property. The ordinance also imposes maintenance and other obligations—whether the property has been foreclosed upon or not—with fines for noncompliance. In 2011, the FHFA sued the city, objecting that the ordinance would have improperly covered the activities of Fannie Mae, Freddie Mac, and their agents. In August 2013, the court held that Fannie Mae and Freddie Mac are exempt from the ordinance, and the FHFA subsequently sought to clarify the scope of the court’s order and asked the court for declaratory and monetary relief. The parties now have agreed to a memorandum of understanding pursuant to which the city will not enforce the ordinance against Fannie Mae, Freddie Mac, or their agents for as long as the GSEs remain under federal conservatorship. The FHFA agreed that Fannie Mae and Freddie Mac will voluntarily register their vacant properties with the city, and the FHFA agreed not to try to recover fees and penalties already paid to the city under the ordinance.
On April 15, Fannie Mae issued Selling Guide Announcement SEL 2014-03, which includes numerous selling policy updates. Based on a comprehensive review of its current requirements, the announcement provides a series of new or updated property eligibility and appraisal requirements, which must be implemented no later than August 1, 2014. The announcement also states that Fannie Mae is retiring its two-step ARM mortgage, as well as standard ARM plans 1030 and 1031. For mortgage loans with notes dated on or after October 15, 2014 where the lender is registered with MERS, Fannie Mae will also require the use of a new rider to modify the standard security instruments in Montana, Oregon, and Washington. The announcement includes numerous additional miscellaneous policy updates, and notes again the recent publication of the Selling Guide on Fannie Mae’s corporate website.
On March 28, Fannie Mae issued Servicing Guide Announcement SVC-2014-05, which provides, as recently promised, updated guidance regarding standard and streamlined modification programs. The announcement informs servicers that, by July 1, 2014, for mortgage loans with a pre-modified mark-to-market loan-to-value ratio less than 80%, servicers must ensure that borrowers satisfy all eligibility requirements for a Fannie Mae standard or streamlined modification. The announcement details the specific steps servicers must take to calculate the terms of the trial period plan. It also provides information for servicers to use in determining the appropriate information to include in an evaluation notice or solicitation letter, and informs servicers that if a borrower is eligible for a trial period plan with more than one amortization term, the borrower may choose an amortization term but the trial period plan notice must inform the borrower that he or she will not be able to change the amortization term after the first payment is received. The announcement states that if a mortgage loan becomes 60 or more days delinquent within 12 months of the modification effective date, the servicer must not approve another modification. Finally, Fannie Mae states that if the first trial period plan payment submitted by a borrower does not correspond to an amortization term payment offered in the plan, the servicer must use the shortest amortization term provided in the plan that is covered by the borrower’s actual payment to determine the amortization term and monthly payment obligation.
On March 28, Fannie Mae notified servicers that, effective May 1, 2014, it will begin issuing warning letters and assessing compensatory fees to servicers that fail to submit Fannie Mae investor reporting system reports on a timely basis or that fail to use the correct data and formats. Alternatively, Fannie Mae reserves the right to issue an indemnification demand to any servicer that breaches these servicing requirements. Currently, Fannie Mae sends a Failed Business Rules report to servicers who fail to meet these requirements. After May 1, a servicer may be assessed: (i) greater of $250 or $50 per mortgage loan, up to a maximum of $5,000, for the first instance of late or inaccurate reporting; (ii) greater of $500 or $50 per mortgage loan, up to a maximum of $10,000, for the second instance of late or inaccurate reporting, if it occurs within one year of the first instance; and (iii) greater of $1000 or $50 per mortgage loan, up to a maximum of $15,000, for each subsequent instance of late or inaccurate reporting within one year of the most recent previous instance.
On April 1, Freddie Mac issued Bulletin 2014-05, and on March 25, Fannie Mae issued Lender Letter LL-2014-02, in response to directives from the FHFA to clarify certain requirements related to appraisals for properties located in rural areas. In the clarifying documents, Fannie Mae and Freddie Mac state that they do not require the use of third-party vendors such as appraisal management companies to order appraisals or to comply with requirements that the mortgage production function and the appraisal ordering and quality assurance functions remain separate. In addition, both Fannie Mae and Freddie Mac provide a small lender exception to the separation requirement. The guidance documents also state that a residential property in a market that contains properties or land uses that are non-residential in nature, is not necessarily ineligible for sale to Fannie Mae or Freddie Mac. Both entities assert that they will purchase a mortgage secured by a property that is unique or may not conform to its neighborhood, provided an appraiser is able to evaluate and report on how the characteristics of the market area and unique property features affect the value and the marketability of the subject property. The guidance documents also advise sellers that in areas with less real estate activity, such as rural market areas, appraisers may, with documented support, use comparable sales that are older than 12 months, or that are a considerable distance from the subject property or not similar to the subject property.
On March 27, Congresswoman Maxine Waters (D-CA), Ranking Member of the House Financial Services Committee, released draft legislation to reform the housing finance market. Congresswoman Waters also released a summary of the proposal and a section-by-section analysis of the bill. The proposed bill, titled the Housing Opportunities Move the Economy (HOME) Forward Act of 2014, offers a counter to a bill already approved by the committee—without any Democratic votes—that would replace Fannie Mae and Freddie Mac with a secondary market funded only by private capital. In certain ways, the HOME Forward Act parallels legislation recently unveiled by the leaders of the Senate Banking Committee. Like its Senate counterpart, Ms. Waters’s bill would establish an insurance fund to provide an explicit government guarantee for certain mortgage-backed securities. Also, similar to the Senate bill, Congresswoman Waters’s proposal would require private backers to take the first 5 percent of any loss (the Senate bill requires private backers to take the first 10 percent of any loss) before the government guarantee is activated. But unlike the Senate bill, which would allow for a variety of issuers to access the mortgage backed security market, the HOME Forward Act would create a co-op of lenders with exclusive authority to issue government-backed MBS. In further contrast to the Senate bill, the HOME Forward Act includes a “waterfall” plan for distribution of Fannie Mae’s and Freddie Mac’s earnings in conservatorship to (i) Treasury Senior Preferred shares; (ii) any reserve funds needed in connection with wind-down of Fannie Mae and Freddie Mac; (iii) outstanding Affordable Housing Fund payments; and (iv) existing preferred and common shareholders, including Treasury as holder of warrants. The HOME Forward Act also would eliminate rigid affordable housing goals and replace them with a broad based duty to serve requirement.
On March 16, Senate Banking Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) released long-awaited draft legislation to end the government’s conservatorship of Fannie Mae and Freddie Mac and reform the housing finance system. The Senators also released a summary of the proposal and a section-by-section analysis. The bill adopts many of the principles originally outlined in bipartisan legislation introduced last year by Senators Mark Warner (D-VA) and Bob Corker (R-TN). Like the Warner-Corker bill, the leadership proposal would create a Federal Mortgage Insurance Corporation (FMIC), modeled in part after the FDIC and intended to provide an explicit government backstop for certain MBS. The government backstop would sit behind private investors required to hold at least 10% capital on FMIC-issued securities. FMIC losses in turn would be backed by a reinsurance fund. The FMIC also would (i) oversee a new mortgage securitization platform; (ii) supervise guarantors, aggregators, servicers, and private mortgage insurers; and (iii) collect fees dedicated to support affordable housing and allocated among the Housing Trust Fund, the Capital Magnet Fund, and a new Market Access Fund. Under the bill servicers, aggregators, and others would be subject to capital requirements now only applicable to banks. The bill would establish a 5% down payment requirement for borrowers, 3.5% for first time borrowers. The bill also would create a jointly owned small lender mutual intended to provide small lenders access to the secondary market. The leadership’s small lender mutual would be open to more banks—any depository institution with up to $500 billion in assets—than the Warner-Corker plan would allow. The Committee is expected to markup the legislation in the coming weeks.
This week, Fannie Mae began providing access to an online version of its single-family Selling Guide through its corporate website. Fannie Mae believes this online version will be easier to navigate and will allow for enhanced search capabilities. The new tool allows users to view on one screen all five Selling Guide part titles and introductions, and allows users to access subparts, chapters, and individual topics. Other new features include the ability to email and print pages.
On March 12, Fannie Mae issued a notice postponing the April 1, 2014 implementation deadline for changes to its standard and streamlined modification programs announced in SVC-2013-28. Those changes expanded the programs to include loans with a pre-modification mark-to-market loan-to-value (MTMLTV) ratio of less than 80%. In the “near future,” Fannie Mae will announce a new effective date and updated requirements for such loans. Until the new requirements become effective, loans with MTMLTVs of less than 80% will continue to be eligible for a standard or streamlined modification if the loan servicer has fully implemented the previously-announced changes. In a separate notice relating to its adjustable-rate mortgage (ARM) plans, Fannie Mae announced that it is requiring sellers and servicers to substitute certain LIBOR indices for the discontinued Federal Reserve Board CD index, and as a result it is retiring two standard ARM plans based on the discontinued index.
On March 11, Fannie Mae and Freddie Mac published the Uniform Closing Dataset’s (UCD) MISMO-mapping document, Appendix B: Closing Disclosure Mapping to the MISMO v3.3 Reference Model, which provides a common dataset to implement the CFPB’s closing disclosure. While Fannie Mae and Freddie Mac have not yet determined the method or timeline for collecting UCD from lenders, the release allows lenders and their vendors to begin preparing for the collection.
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 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 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.”