On October 8, FHFA Director Mel Watt announced Janell Byrd-Chichester as the agency’s new Chief of Staff. From 2010 to 2014, Ms. Byrd-Chichester was a partner at DC’s Mehri & Skalet law firm in their fair housing, lending and consumer protection practice. Prior to joining Mehri & Skalet, Ms. Byrd-Chichester held positions at DC’s Cochran Firm, the NAACP Legal Defense Fund, and the North Carolina Central University School of Law, and she clerked for the Honorable Cecil F. Poole of the U.S. Court of Appeals for the Ninth Circuit.
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.
On October 6, the FHFA announced that it would extend the comment period for its proposed rule on Federal Home Loan Bank membership. The proposed rule is intended to revise the requirements for financial institutions to apply for and retain membership in the FHLB. Comments are now being accepted until January 12, 2015.
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.
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.
On September 2, the Federal Housing Finance Agency (FHFA) issued a proposed rule that would revise the requirements for financial institutions to apply for and retain membership in the Federal Home Loan Banks (FHLB). The proposed rule would change existing membership requirements primarily to: (i) require each applicant and member institution to hold one percent of its assets in “home mortgage loans” in order to satisfy the statutory requirement that an institution make long-term home mortgage loans; (ii) require each member to comply with the foregoing requirement on an ongoing basis, and where applicable, with the requirement that it have at least 10 percent of its assets in “residential mortgage loans”; (iii) define the term “insurance company” to mean a company that underwrites insurance for nonaffiliated persons as its primary business, effectively excluding from Bank membership captive insurers, but permit existing captive members to remain members for five years with certain restrictions on their ability to obtain advances; (iv) require a Bank to obtain and review an insurance company’s audited financial statements when considering it for membership; and (v) clarify the standards by which an insurance company’s “principal place of business” is to be identified in determining the appropriate Bank district for membership. The comment period will be open for 60 days following publication of the proposed rule in the Federal Register.
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.
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 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.