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 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 August 14, Freddie Mac issued Bulletin 2014-15, which reminds seller/servicers subject to the AML requirements of the BSA that they are expected to maintain an AML compliance program and are required to report to Freddie Mac any instances of AML program noncompliance. Effective October 1, 2014, Freddie Mac is also requiring seller/servicers not subject to the AML provisions of the BSA to develop internal controls and policies and procedures to detect and report Suspicious Activity to Freddie Mac (but without the requirement to file SARs). Additionally, the Bulletin notifies seller/servicers that, effective October 15, 2014, Freddie Mac will require wholly-owned subsidiaries of seller/servicers that are federally-regulated depository institutions to obtain separate Freddie Mac seller/servicer approvals. The Bulletin also: (i) provides that seller/servicers can waive the requirement for flood insurance for non-residential detached structures located on the Mortgaged Premises; (ii) clarifies ULDD data points; (iii) updates Freddie Mac’s certificate of incumbency for sellers and warehouse lenders (effective October 1, 2014); and (iv) updates miscellaneous manufactured home requirements.
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 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, Freddie Mac issued Bulletin 2014-14, which announced a new automated settlement process for mortgage modification settlements. Effective December 1, 2014, servicers must submit the required settlement data for a modification of a conventional first lien Freddie Mac-owned or guaranteed mortgage via the new “Loan Modification Settlement” screen in Workout Prospector. Servicers may begin doing so on or after August 25, 2014. In addition, the Freddie Mac is amending mortgage modification signature requirements to provide that a servicer and any borrowers can agree to extend, modify, forbear, or make any accommodations with regard to a Fannie Mae/Freddie Mac Uniform Security Instrument or the Note, as otherwise authorized by Freddie Mac, without obtaining the co-signer’s signature or consent on the condition that the Security Instrument that was signed by the co-signer contained a provision allowing for such action. The bulletin also, among other things, (i) updates transfer of ownership and assumption requirements; (ii) revises certain requirements for mortgages insured by the FHA or guaranteed by the VA or Rural Housing Service; and (iii) adds several new expense codes related to attorney fees and costs and updates certain attorney fees and costs reimbursement requirements.
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 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.
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.
On June 19, Freddie Mac issued Bulletin 2014-12, which updates and revises numerous selling and servicing requirements. According to the Bulletin, Freddie Mac has determined that because sellers/servicers will have difficulty complying with the CFPB’s borrower notification requirements for ARMs with lookback periods less than 45 days, as of January 1, 2015, Freddie Mac will no longer purchase those loans. Freddie Mac also announced that, effective October 15, 2014, mortgages originated in Montana, Oregon, and Washington where MERS is not the original mortgagee of record, but is a subsequent assignee, are not eligible for sale to Freddie Mac. The Bulletin updates and clarifies several other MERS-related requirements. In addition, the Bulletin announces revisions to fraud reporting requirements to require a seller/servicer to report fraud and suspected fraud to Freddie Mac when the seller/servicer has a reasonable belief that certain actions occurred during origination or servicing of a mortgage, and to extend the number of days within which a seller/servicer must report fraud and suspected fraud to Freddie Mac from 30 to 60 days. Finally, the Bulletin provides numerous additional updates related to (i) certain servicing-related forms; (ii) relief refinance mortgages; (iii) monthly debt-to-income ratio requirements; (iv) requirements for verification of large deposits; (v) area median income estimates; and (vi) several other selling issues.
Recently, Fannie Mae (Servicing Guide Announcement SVC-2014-12) and Freddie Mac (Bulletin 2014-11) introduced a temporary modification option targeted to borrowers located in Detroit, Michigan as part of the FHFA-directed Neighborhood Stabilization Initiative. The announcements provide the borrower, property, and mortgage eligibility requirements, borrower documentation requirements, and other program details. The announcements also establish requirements for servicers to process the new modification options, which servicers must implement for all evaluations conducted on or after September 1, 2014.
On June 5, the FHFA issued a request for input regarding its proposed increases to guarantee fees (g-fees) that Fannie Mae and Freddie Mac charge lenders. Earlier this year, FHFA Director Mel Watt halted g-fee changes announced by the agency under Mr. Watt’s predecessor. Those changes would have (i) raised the base g-fee for all mortgages by 10 basis points; (ii) adjusted up-front fees charged to borrowers in different risk categories; and (iii) suspended the up-front 25 basis point adverse market fee in all but four states. The FHFA now poses more than a dozen questions for commenters to consider and respond to as the FHFA assesses future policies regarding g-fees. Comments are due by August 4, 2014.