On May 8, FHFA Director Mel Watt spoke at the 22nd Annual Economic Summit, focusing on the agency’s conservatorship activities with Fannie Mae and Freddie Mac (GSEs). Most significantly, Director Watt announced that the agency is extending the GSEs’ participation in HAMP and HARP until the end of 2016. Since their 2009 inception, the two programs have relieved many borrowers of high monthly payments. HARP, allowing borrowers who regularly make their mortgage payments to refinance their loans and take advantage of low income rates, and HAMP, providing significant payment reductions tied to borrowers’ income, have prevented a number of foreclosures. Since HARP and HAMP were never intended to be permanent programs, this will be FHFA’s final extension of the GSEs’ participation. Looking forward, the agency plans to “consider how best to build on the lessons of HAMP for 2017 and beyond,” exploring possible streamlined modifications and refinance solutions for borrowers.
On May 20, the FHFA announced that Fannie Mae and Freddie Mac released updates to their operational and financial eligibility requirements for single-family mortgage Seller/Servicers. Because of changes in the servicing industry, the FHFA directed Fannie and Freddie to update their Seller/Servicer standards to “help ensure the safe and sound operation of the Enterprises and provide greater transparency, clarity and consistency to industry participants and other stakeholders and reflect feedback received over the past several months.” Fannie Mae’s revised operational standards will take effect by September 1, 2015, and Servicers must implement the financial eligibility changes by December 31, 2015. Operational standards for Freddie Mac Servicers will take effect August 18, 2015; financial eligibility revisions must be in place by December 31, 2015.
On April 17, the FHFA announced that Fannie and Freddie have revised the requirements for private mortgage insurance companies insuring mortgage loans that Fannie and Freddie either own or guarantee. By setting financial and operational standards for the mortgage insurers seeking approval with Fannie and Freddie, the new requirements are designed to reduce risk to the GSEs. The new requirements are effective immediately for new applicants and will become effective December 31, 2015 for existing insurers already approved by Fannie and Freddie.
On March 18, the FHFA Inspector General released a white paper detailing the challenges faced by the government-sponsored enterprises (GSEs) that could adversely affect their future profitability. According to the white paper, the GSEs’ return to profitability in 2012 was linked significantly to non-recurring sources of income such as the release of valuation allowances against deferred tax assets, settlements of disputed representation and warranty claims, and settlements of legal claims relating to mortgage-backed securities. Specifically, the OIG reported that non-recurring sources accounted for 60% and 45% of net income in 2013 and 2014 respectively. In addition, the white paper cites the GSEs’ requirement to decrease its retained portfolio annually by 15%, requirements to pay a quarterly dividend to Treasury, the possibility of lower guaranty fees, congressional inaction to adopt housing finance reform, and market conditions such as changes in interest rates and home prices as factors that could force the GSEs to draw on the Department of Treasury for a taxpayer-funded bailout.
On January 21, the Committee on Financial Services, in a voice vote, agreed to a new oversight plan that identifies the areas that the Committee and its subcommittees plan to oversee during the 114th Congress. Notable sections of the oversight plan include: (i) examining the governance structure and funding mechanism of the CFPB; (ii) reviewing recent rulemakings by the CFPB and other agencies on a variety of mortgage-related issues; (iii) examining the effects of regulations promulgated by Dodd-Frank on community financial institutions; and (iv) examining proposals to modify the GSEs.
On December 8, Fannie Mae and Freddie Mac announced new loan programs allowing for a down payment as low as three percent intended to “remove barriers for creditworthy borrowers to get a mortgage” and provide them with “a responsible path to homeownership.” The “97 percent LTV” program launched by Fannie Mae targets first-time home buyers, while the Home Possible Advantage program introduced by Freddie Mac offers mortgage loans to low- and moderate-income borrowers. The recently announced options further the agencies’ efforts to establish a more stable mortgage market.
On November 3, FHFA Director Mel Watt announced David Applegate as the CEO for Common Securitization Solutions, LLC (CSS). As detailed in FHFA’s 2014 Strategic Plan for the Conservatorships, the creation of CSS furthers the goal to build a new securitization infrastructure to meet the needs of Fannie and Freddie. Prior to being named to the CEO post at CSS, Applegate served as the President, CEO of Homeward Residential, Inc. In addition, Applegate previously served as an executive with GMAC Mortgage and GMAC Bank. CSS was created by both Fannie and Freddie to operate a new secondary mortgage infrastructure, Common Securitization Platform. The platform is intended to replace certain elements of the GSEs’ proprietary system with regards to securitizing mortgages and performing back-office administrative functions.
On October 21, a federal judge dismissed the claims brought by the State AG that the GSEs violated state law by putting limits on the sale of pre- and post-foreclosure homes. Commonwealth v. Fed. Hous. Fin. Agency, No. 14-12878-RGS, 2014 BL 295733 (D. Mass. Oct. 21, 2014). In this case, the State argued that the GSEs violated a state law by refusing to sell homes in foreclosure to nonprofit organizations who intended to restructure the loan and sell or rent the property back to the original homeowner at a lower price. The 2012 state law forbids banks and lenders from refusing to consider offers from legitimate buyback programs solely because the property will be resold to the former homeowner. The judge dismissed the lawsuit agreeing with the FHFA, conservator of the GSEs, that the Housing and Economic Recovery Act of 2008 (HERA) allows the FHFA to enforce restrictions under its conservatorship mandate authorized by Congress. Further, the judge noted that “Congress, by enacting HERA’s Anti-Injunction Clause, expressly removed such conservatorship decisions from the courts’ oversight.” The State is expected to appeal the decision.
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.
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.
On September 15, Freddie Mac released a bulletin updating portions of Single-Family Seller/Servicer Guide (“Guide”) governing foreclosures and foreclosure alternatives. The updates include changes to the loan modification process that will allow mortgagees reimbursement for a broader scope of fees and costs incurred in any loan modification after March 1, 2015 and extending Trial Period Plan timelines for borrowers in bankruptcy who enter a plan on or after November 1, 2014. The bulletin also revises the amount of fees and costs recoverable in foreclosure for claims submitted to Freddie Mac on or after October 20, 2014 and implements a new web-based system for appealing state foreclosure timeline-related compensatory fees. The new appeals system will be made available on October 27, 2014 and will be mandatory as of January 1, 2015. Other changes to the Guide are more fully described in the complete bulletin.
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 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 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.