On May 23, the FHFA proposed a rule to require the Federal Home Loan Banks (FHLBs) to base determinations about the appropriateness of specific investments or activities on their own internal documented analyses of credit and other risks. Currently the FHLBs use credit ratings provided by certain national credit rating organizations. Dodd-Frank Act section 939A requires the FHFA and other federal regulators to review regulations that require use of such credit rating firms. The FHFA proposal seeks comment on alternative analyses for use by the FHLBs in assessing investments, standby letters of credit, and liabilities. Comments on the proposal are due by July 22, 2013.
On May 30, the FHFA announced that Fannie Mae and Freddie Mac will extend the Home Affordable Modification Program (HAMP) through December 31, 2015. Concurrently, the Treasury Department and HUD announced an extension of the HAMP deadline for non-Fannie Mae and Freddie Mac loans to harmonize with the FHFA extension. The programs were set to expire at the end of 2013. In addition, the FHFA extended from August 2015 through the end of 2015 its streamlined modification initiative.
On May 20, the U.S. Court of Appeals for the Sixth Circuit overturned a district court decision and held that Fannie Mae and Freddie Mac are exempt from state and local real estate transfer taxes. Oakland v. Fed. Hous. Fin. Agency, No.12-2135/2136, 2013 WL 2149964 (6th Cir. May 20, 2013). In this case, as in other similar cases pending around the country, Michigan counties and the state of Michigan sued to recover state and local real estate transfer taxes from Fannie Mae, Freddie Mac, and the FHFA for property transfers made by those entities. The appeals 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 that it applied the same exemption to the FHFA as conservator in the 2008 Housing and Economic Recovery Act. The court rejected the state and local entities’ argument that the phrase “all taxation” applies only to direct taxes and not excise taxes. The court added that Congress specifically carved out real property taxes from the “all taxation” exemption, but did not carve out the types of transfer taxes at issue in this case. The court vacated the district court’s order and remanded with direction that the district court enter summary judgment for the FHFA, Fannie Mae, and Freddie Mac. In a statement issued after the decision, one Michigan county stated that it plans to seek Supreme Court review.
On May 1, President Obama announced the nomination of Representative Mel Watt (D-NC) to serve as Director of the FHFA. Mr. Watt has represented portions of Charlotte and other North Carolina communities since 1993 and currently is a member of the House Committees on Financial Services and Judiciary. He would replace FHFA Acting Director Edward DeMarco, who federal and state Democratic policymakers and housing groups have called on to be replaced, in part based on his decision to not direct Fannie Mae and Freddie Mac to engage in broad principal reduction programs. On the same day as the President’s announcement, the Congressional Budget Office released a report that examined three options for Fannie Mae and Freddie Mac to use principal forgiveness, which the CBO finds would be likely to (i) result in small savings to the government, (ii) slightly reduce mortgage foreclosure and delinquency rates, and (iii) slightly boost overall economic growth.
On April 30, the FHFA published a progress report on the current design principles and functions on the common securitization platform for residential mortgage-backed securities that it is building. The report explains that Fannie Mae, Freddie Mac, and the FHFA are working to (i) establish an initial ownership and governance structure, (ii) design dedicated resources and establish an independent location site for the platform team, (iii) develop the design, scope and functional requirements for the platform’s modules and develop the initial business operational process model, (iv) develop a multi-year plan for building, testing and deployment of the system, and (v) develop and begin testing the platform. The report also reviews the status of the alignment of Fannie Mae’s and Freddie Mac’s securitization contracts and standards, including ongoing efforts to align (i) solicitation of borrower refinances of loans in a pool, (ii) repurchases and substitutions of loans from a pool, (iii) representations and warranties, and (iv) pooling practices. According to the report, the FHFA also will continue to (i) identify and develop standards in data, disclosure and seller/servicer contracts, (ii) develop and execute work plans for alignment activities with regard to common standards and creation of legal/contractual documents to facilitate varied credit risk transfer transactions, and (iii) engage with the public in a variety of forums to seek feedback and incorporate revisions and support FHFA progress reports to the public. The report also discusses efforts to respond to concerns about non-guaranteed residential mortgage-backed securities.
On April 11, the FHFA announced that Fannie Mae and Freddie Mac will extend the Home Affordable Refinance Program (HARP) to December 31, 2015. The program was set to expire at the end of 2013. In addition, the FHFA plans to launch a nationwide campaign to educate consumers about HARP. The FHFA announcement also includes HARP frequently-asked-questions and eligibility criteria for a HARP refinance.
On April 5, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s partial denial of a financial institution’s motion to dismiss on standing and timeliness grounds a suit brought by the FHFA. Fed. Hous. Fin. Agency v. UBS Americas, Inc., No. 12-3207, 2013 WL 1352457 (2d Cir. Apr. 5, 2013) The FHFA brought multiple suits against numerous institutions alleging that the offering documents provided to Fannie Mae and Freddie Mac in connection with the sale of $6.4 billion in residential MBS included materially false statements or omitted material information, resulting in massive losses. The institutions moved to dismiss, contending that (i) the securities claims were time-barred, (ii) FHFA had no standing to pursue the action, and (iii) a negligent misrepresentation claim failed to state a claim upon which relief could be granted. The district court denied the motion to dismiss with respect to the statutory claims and granted it only with respect to the negligent misrepresentation claim. On appeal, the Second Circuit held that the action, filed within three years after the FHFA was appointed conservator of Freddie Mac and Fannie Mae, was timely under the relevant sections of Housing and Economic Recovery Act, and that the FHFA has standing to bring the action. The decision, on interlocutory appeal from the U.S. District Court for the Southern District of New York, holds implications for more than a dozen other similar actions the FHFA has filed.
On March 26, the FHFA Office of Inspector General (OIG) issued a report that concludes the FHFA has failed to actively oversee how Fannie Mae and Freddie Mac monitor counterparty compliance with federal and state consumer protection laws. The OIG review found that the FHFA is vulnerable to questions about why it does not have a strategy to monitor the Enterprises’ activities to assess whether they are aligned with the public interest as reflected in federal and state laws and regulations, and that the Enterprises’ failure to pursue seller repurchase demands related to mortgages in default with no material underwriting deficiencies—but that were originated in violation of consumer protection laws—may result in losses to the Enterprises that could be avoided or mitigated. The OIG concludes that given the FHFA’s duty under HERA to ensure that the activities of the Enterprises are consistent with the public interest, the FHFA should develop and implement a risk-based plan to monitor the Enterprises’ oversight of their counterparties’ compliance with contractual requirements, including consumer protection laws. According to the report, the FHFA has begun to put together a plan to address this oversight role.
On March 27, the FHFA announced that Fannie Mae and Freddie Mac will begin a new loan modification initiative on July 1, 2013. As described in more detail in Fannie Mae Servicing Guide Announcement SVC-2013-05 and Freddie Mac Bulletin Number 2013-5, servicers will be required to offer eligible borrowers who are at least 90 days delinquent on their mortgage a way to lower their monthly payments and modify their mortgage without requiring financial or hardship documentation. Eligible borrowers will need to demonstrate a willingness and ability to pay by making three on-time trial payments, after which the mortgage will be permanently modified. Borrowers will still have the option to document income and financial hardship, which could result in a modification with additional savings. The program will expire on August 1, 2015.
On March 26, the FHFA released a notice seeking comment on certain restrictions it expects Fannie Mae and Freddie Mac (the Enterprises) will put in place with regard to lender placed insurance practices. The FHFA anticipates that the Enterprises will (i) prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with placing coverage with or maintaining placement with particular insurance providers; and (ii) prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with an insurance provider ceding premiums to a reinsurer that is owned by, affiliated with or controlled by the sellers or servicer. The final restrictions will be issued by the Enterprises as aligned guidance to sellers and servicers four months after the close of the comment period, which will run for 60 days from the date of publication of the notice in the Federal Register. Pursuant to that timeline, a final policy could be expected in late September or early October.
On March 19, the Senate Banking Committee and the House Financial Services Committee each held a hearing to review issues related to housing finance post-federal conservatorship of Fannie Mae and Freddie Mac. The House committee heard from Acting FHFA Director Edward DeMarco, while the Senate committee heard from non-governmental groups with reform proposals. The hearings mark the beginning of a process expected to play out over the course of the coming months to develop consensus on legislation to reform the housing finance sector. Each of the hearings covered numerous topics, but in each the central issue for debate was the appropriate level of government involvement in the mortgage market. On that primary issue, there was broad consensus that the current conservatorship role of the government should end. However, some stakeholders argued the government should play no role in the reformed market, while others believe a limited, protected government backstop would be necessary to support an affordable, stable housing market. Mr. DeMarco did not take positions on the broad policy issues, but repeated his commitment to implementing the FHFA’s Strategic Plan while positioning Fannie Mae and Freddie Mac to meet whatever requirements policymakers choose to impose.
On March 15, the attorneys general (AGs) for nine states sent a letter to President Obama and Senate leaders seeking the appointment of a permanent director for the FHFA to replace Acting Director Edward DeMarco. The AGs complain that under Mr. DeMarco’s leadership, “Fannie Mae and Freddie Mac remain an obstacle to progress by refusing to adopt policies that will help maximize relief for homeowners,” identifying the FHFA’s opposition to allowing the entities to offer principal forgiveness as the primary issue. The AGs follow federal lawmakers who made a similar plea last month. Recently, it was reported that the President is considering Representative Mel Watt (D-NC) for the position. During a Senate hearing this week, Senator Bob Corker (R-TN) defended Mr. DeMarco and responded that any nominee for FHFA director should lack political bias and possess technical expertise to help guide Congress through development and implementation of housing reform.
Today, the FHFA Office of Inspector General (OIG) issued a report on servicers’ handling of borrower complaints, following an audit to assess FHFA’s oversight of Freddie Mac’s controls over servicers’ handling of escalated cases. Under the Servicing Alignment Initiative (SAI), servicers are required to track the escalated cases they receive – specifically defined to include any of five categories of complaints – and resolve those cases within 30 days. In addition, Freddie Mac’s Servicing Guide requires servicers to report monthly on escalated cases status, including when received and how resolved. According to the report, the audit revealed that (i) most of Freddie Mac’s servicers are not complying with reporting requirements for escalated cases, (ii) Freddie Mac’s oversight of servicer compliance has been inadequate, and (iii) the FHFA did not identify the foregoing problems through its own examination of Freddie Mac’s implementation of the SAI. In response, the OIG recommends that FHFA (i) ensure that Freddie Mac requires its servicers to report, timely resolve, and accurately categorize escalated cases, (ii) ensure that Freddie Mac enhances its oversight of its servicers through testing servicer performance and establishing fines for noncompliance, and (iii) improve its oversight of Freddie Mac by developing and implementing examination guidance related to testing the implementation of directives. Following receipt of the report, House Oversight Committee Ranking Member Cummings (D-MD) called for a hearing on borrower complaint handling by servicers.
On March 4, FHFA Acting Director Edward DeMarco sketched out the FHFA’s plans for Fannie Mae and Freddie Mac (the Enterprises) in 2013. These measures implement the Strategic Plan issued in February 2012 that identified three goals for the Enterprises: (i) build a new infrastructure for the secondary market, (ii) contract the Enterprises’ presence in the secondary market, and (iii) maintain foreclosure prevention activities. In 2013, the FHFA expects to support its first goal by creating an independent business entity that will serve as a securitizing platform. To continue contracting the Enterprises’ presence, the FHFA (i) has asked each Enterprise to conduct risk sharing transactions to meet a target of $30 billion of unpaid principal balance in credit risk sharing transactions, (ii) plans to continue increasing guarantee fees, (iii) aims to reduce multifamily business volume by 10 percent, and (iv) plans to sell five percent of the less liquid portion of the enterprises retained portfolios. Finally, on foreclosure prevention, the FHFA expects to (i) enhance the post-delivery quality control practices and transparency associated with the new representation and warranty framework, and (ii) work to complete representation and warranty demands for pre-conservatorship loan activity. In addition to making strides on the three prongs of its Strategic Plan, the FHFA plans to (i) update master policies and formulate eligibility standards for mortgage insurance, and (ii) develop a set of aligned standards for force placed insurance.
On February 7, 45 Democratic Members of the House of Representatives sent a letter to President Obama requesting he nominate a permanent director for the FHFA to replace Acting Director Edward DeMarco. The Members object to the FHFA’s decision not to direct Fannie Mae and Freddie Mac to offer principal reduction assistance to troubled borrowers. The FHFA and Mr. DeMarco believe that principal forgiveness does not improve foreclosure avoidance while reducing costs to taxpayers relative to existing policies. In their letter, the Members argue that the FHFA’s decision under Mr. DeMarco is contrary to the intent of the federal law that created the FHFA as conservator. Further, the Members charge that Mr. DeMarco’s stated reasoning has been contradicted by the FHFA’s own data, which indicates that principal reduction loan modifications could save U.S. taxpayers billions of dollars compared to both allowing underwater homes to go into foreclosure, and the FHFA’s preferred alternative of principal forbearance. In support of their position that a new director is needed to properly implement congressional directives meant to support the housing market, the Members also cite (i) the FHFA’s decision not to allow the implementation of a principle forgiveness pilot program, and (ii) recently proposed increased state-level guarantee fees charged by Fannie Mae and Freddie Mac in certain states.