On February 14, Freddie Mac issued Bulletin 2014-02, which includes numerous selling and servicing policy changes. For example, the Bulletin states that, effective for mortgages with settlement dates on or after June 1, 2014, (i) sellers’ reserves must be based on the full monthly payment amount for the property, not only principal, interest, taxes, and insurance; (ii) sellers no longer have to provide borrowers an additional six months’ reserve when the borrower converts a two- to four-unit primary residence to an investment property; and (iii) Freddie Mac is removing the requirements that the appraisal must be dated no more than 60 days prior to the note date when used to document the value of a primary residence pending sale or being converted to a second home or an investment property for the purposes of establishing the minimum required reserves. Freddie Mac also is reducing the delivery fee rate to 75 basis points for Home Possible Mortgage purchase transactions with settlement dates on or after March 1, 2014. Also for sellers, the Bulletin (i) introduces a summary of changes made to Guide Exhibit 19, Postsettlement Delivery Fees; (ii) revises resubmission requirements for mortgages submitted to Loan Prospector after the note date or the effective date of Permanent Financing for Construction Conversion and Renovation Mortgages; (iii) updates the Guide to include Phase 2 ULDD data point requirements and clarifications on existing ULDD data points; and (iv) updates and consolidates property eligibility and appraisal requirements in Guide Chapter 44, Property and Appraisal Requirements. For sellers and servicers, the Bulletin announces updates to Guide Form 16SF, Annual Eligibility Certification Report, to enhance its usability and provide additional functionality. Finally, for servicers, the Bulletin revises requirements for reimbursement of condominium, homeowners’ association and Planned Unit Development assessments in states where a lien for such amounts can take priority over Freddie Mac’s lien.
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.”
On January 24, Freddie Mac issued Bulletin 2014-01, which updates and revises servicing requirements related to (i) step-rate mortgages; (ii) foreclosures; (iii) third-party use of Workout Prospector and BPOdirect; and (iv) electronic default reporting requirements. Effective April 1, 2014, servicers must provide notification of an initial interest rate adjustment for a step-rate mortgage to the borrower as early as 150 days, but no less than 90 days, prior to the first payment due date at the adjusted interest rate. A second notification of the initial interest rate adjustment must be provided as early as 75 days, but no less than 60 days, prior to the first scheduled payment at the new rate. For mortgages requiring two or more interest rate adjustments to reach the corresponding interest rate cap, servicers must provide borrowers written notification of the upcoming interest rate change for each subsequent rate adjustment as early as 120 days, but no less than 60 days, prior to the first payment due date at the re-adjusted rate. In addition, servicers’ staff must be adequately trained to discuss interest rate adjustments with borrowers. Among the foreclosure-related updates, the Bulletin provides notice to servicers regarding changes in state foreclosure time lines, updates requirements for reimbursement of costs associated with the posting and publication of foreclosure notices, and updates provisions for expediting default legal matters and foreclosure sale bidding. With regard to Workout Prospector and BPOdirect, effective immediately Freddie Mac is allowing authorized third-party service providers to access those tools. Finally, the Bulletin updates certain default action codes, which servicers must use beginning May 1, 2014.
On January 9, Representatives Ed Royce (R-CA), Jim Himes (D-CT), Spencer Bachus (R-AL), and Carolyn Maloney (D-NY) petitioned FHFA Director Mel Watt to expeditiously direct Fannie Mae and Freddie Mac to revise their seller/servicer guidelines to permit the use of credit scores from alternative credit score providers, so long as the scores are “empirically derived and demonstrably and statistically sound.” The lawmakers argue that a move to permit the use of scores other than those offered by FICO would “remove an unfair barrier to entry in the mortgage market” and “encourage the development of more predictive credit scores.”
On December 18, Freddie Mac announced in Seller/Servicer Guide Bulletin 2013-27 updated and revised policies related to foreclosures and alternatives to foreclosure, and related to lender-placed insurance. With regard to foreclosures, Freddie Mac is requiring that the “Obtain Credit Bid” functionality be used for all foreclosure sales occurring on or after March 17, 2014. In addition, Freddie Mac advised that it will reimburse up to a maximum total of $500 for the initial property registration and the re-registration, and that, upon request, servicers must assist Freddie Mac or its vendors in obtaining case file documentation. With regard to alternatives to foreclosures, Freddie Mac (i) expanded its standard and streamlined modification programs to include mortgages with pre-modification mark-to-market loan-to-value ratios less than 80 percent; (ii) eliminated the option for borrowers to retain adjustable-rate-terms in connection with a Capitalization and Extension Modification for disaster relief; (iii) provided servicers discretion to determine the length of a short-term forbearance plan for mortgages impacted by an eligible disaster; and (iv) revised evaluation criteria for borrower contributions towards a short sale or deed-in-lieu of foreclosure. Finally, the Bulletin states that servicers may no longer receive compensation or incentives from lender-placed insurance carriers, and servicers or their affiliates may not insure or reinsure lender-placed insurance.
On December 16, the FHFA requested public comment on a plan gradually to reduce the maximum size of loans purchased by Fannie Mae and Freddie Mac. The FHFA bases the plan on the uncertain future of Fannie Mae and Freddie Mac and “the desire for private capital to re-enter the market.” The FHFA states that it is considering starting the gradual decrease with approximately a four percent reduction in the maximum loan limit for one-unit properties—for example, from $417,000 to $400,000 in most locations, and from $625,000 to $600,000 for the highest-cost areas. The lower purchase limits would, at the earliest, apply to loans originated after October 1, 2014. The FHFA seeks specific comments on (i) the appropriate advance notice period for any final changes; (ii) the timing of any subsequent adjustments; (iii) whether any such subsequent adjustments should be announced in a multi-year schedule, and, if so, whether they should be based on specific dollar amount reductions or percent changes per year; (iv) whether reductions to the limit for areas that fall between the baseline limit and the high-cost limit should continue to be tied to median house prices or should be proportional to reductions in the baseline limit; and (v) whether loan limits should be set at even multiples of either $1,000 or some other dollar amount. Comments are due no later than March 20, 2014.
On December 16, Fannie Mae issued Selling Guide Announcement SEL-2013-09 and Freddie Mac issued Bulletin 2013-26 to implement new guarantee fees (g-fees) for 2014, as recently mandated by the FHFA. The announcements provide updated up-front g-fee grids, which the FHFA claims are needed to better align pricing with the credit risk characteristics of the borrower.
On December 9, the FHFA directed Fannie Mae and Freddie Mac to raise guarantee fees (g-fees). Under the directive, Fannie Mae and Freddie Mac will increase the base g-fee (or ongoing g-fee) for all mortgages by 10 basis points, and will update the up-front g-fee grid to better align pricing with the credit risk characteristics of the borrower. In addition, the up-front 25 basis point adverse market fee that has been assessed on all mortgages purchased by Freddie Mac and Fannie Mae since 2008 will be eliminated except in four states. As described in the FHFA’s State-Level Guarantee Fee Analysis, mortgages newly acquired by Fannie Mae and Freddie Mac that are originated in states that have expected carrying costs more than two standard deviations above the national average, will be charged an additional upfront guarantee fee of 25 basis points. The affected states include New York, New Jersey, Connecticut, and Florida. The FHFA originally proposed charging fees on mortgages originated in all states over one standard deviation, which would have covered the four listed, plus Illinois. The new g-fees will apply to (i) all loans exchanged for mortgage-backed securities with settlements starting April 1, 2014, and (ii) all loans sold for cash with commitments starting March 1, 2014.
FHFA Holds Conforming Loan Limits Steady, Announces Overhauled Mortgage Insurance Master Policy Requirements
On November 26, FHFA announced that 2014 maximum conforming loan limits will remain at $417,000, unchanged from 2013. On December 2, FHFA announced that Fannie Mae and Freddie Mac soon will provide guidance to lenders and servicers regarding specific effective dates for new requirements under the entities’ aligned, overhauled mortgage insurance master policies, which guidance will include changes related to loss mitigation, claims, assurance of coverage, and information sharing. FHFA, Fannie Mae, and Freddie Mac anticipate that the master policies will go into effect in 2014, pending review and approval by state insurance regulators.
On November 25, Freddie Mac issued Bulletin 2013-24 and Fannie Mae issued Servicing Guide Announcement SVC-2013-23, which revised numerous short sale and deed-in-lieu of foreclosure (DIL) requirements. The enterprises updated, among other things, eligibility requirements for exceptions to borrower documentation for short sales and DILs by (i) permitting a borrower whose mortgage debt has been discharged in a Chapter 7 bankruptcy to be eligible for an exception to documentation, regardless of FICO score; and (ii) removing mortgages that were originated as investment properties from eligibility for an exception to documentation. The enterprises also required servicers to: (i) submit a short sale or DIL recommendation for approval when the borrower’s cash reserves exceed $50,000; and (ii) delay, or ensure that foreclosure counsel delays, the next legal action in the foreclosure process when such servicers receive a first complete borrower response package (BRP) more than 37 days prior to a scheduled foreclosure sale date, and the evaluation results in an offer to proceed with a short sale or DIL. Finally, the enterprises revised the timeframes within which servicers are required to conduct an expedited review of a completed BRP and updated requirements relating to borrower appeals.
On November 15, Freddie Mac issued Bulletin 2013-23, which withdraws recently announced fraud training requirements and describes various changes to other requirements. Citing the need to assess industry feedback, Fannie Mae withdrew Bulletin 2013-18, which required, among other things, that seller/servicers provide third-party vendors retained to perform functions relating to origination and servicing of mortgages with training on fraud prevention, detection, and reporting. In addition, Bulletin 2013-23 (i) updates payment history verification requirements for manually underwritten mortgages; (ii) announces that previously announced eligibility requirements applicable to higher-priced mortgage loans (HPMLs) are applicable to higher-priced covered transactions (as defined in the CFPB ability to repay/qualified mortgage rule) and not solely to HPMLs; (iii) updates certain requirements for Freddie Mac Relief Refinance Mortgages; (iv) updates requirements for verifying tax information for borrowers with income derived from sources in Puerto Rico, Guam and the U.S. Virgin Islands; and (v) clarifies signature requirements for security instruments.
On November 5, the FHFA announced that it had directed Fannie Mae and Freddie Mac to implement new restrictions on lender-placed insurance practices. In March, the FHFA sought comments on certain potential lender-placed insurance restrictions, including new policies to (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. Following that comment process and related efforts by the FHFA to obtain feedback on these issues, the FHFA now has directed Fannie Mae and Freddie Mac to provide aligned guidance to sellers and servicers to prohibit servicers from being reimbursed for expenses associated with captive reinsurance arrangements. The announcement does not provide any timeline for the new guidance, but states Fannie Mae and Freddie Mac will provide implementation schedules with the new rules.