FHFA OIG Recommends Increased Oversight Of Repurchase Late Fees

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.

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New York Appellate Court Resolves Trial Court Split Over Statute Of Limitations For Repurchase Suits

On December 19, the Supreme Court of New York, Appellate Division, held that the statute of limitations on claims related to mortgage repurchase obligations begins to run as of the date of closing of the loan purchase agreement. Ace Securities Corp v. DB Structured Prods., Inc., No. 650980/12, 2013 WL 6670379 (N.Y. App. Div. Dec. 19, 2013). The decision resolves a split at the trial court level that resulted from diverging opinions issued earlier this year, in which one court held that the clock on claims by trustees that a securitizer breached its contract by failing to repurchase began to run on the date the representations were made (i.e. the date the pooling and servicing agreement closed), while another court held that the statute did not begin to run until the securitizers improperly rejected the trustee’s repurchase demand, i.e. the breach is the failure to comply, not the date of the representation. On appeal of the latter holding, the court rejected the trustee’s and investors’ argument that the statute does not begin to run until the lender refused to cure or repurchase the defective loans, and held that the claims accrued on the closing date of the pooling and servicing agreement, at which time any alleged breach of the representations and warranties contained therein occurred.

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FHFA Announces Substantial RMBS Settlement

On October 25, the FHFA announced that a large bank agreed to pay $4 billion to avoid further litigation over allegations that the offering documents it provided to Fannie Mae and Freddie Mac in connection with the sale of billions of dollars in RMBS included materially false statements or material omissions, resulting in massive losses to the enterprises. The FHFA has now resolved four of the 18 RMBS suits it filed in 2011. The FHFA announcement also noted that the bank had reached separate settlements with Fannie Mae and Freddie Mac totaling $1.1 billion to resolve disputes over representation and warranties in whole loans purchased by those entities.

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Fannie Mae Amends Bifurcated Mortgage Loan Obligations, Announces Miscellaneous Servicing Guide Updates

On June 12, Fannie Mae issued two Servicing Guide Announcements relating to bifurcated mortgages, mortgage payments, valuations, and processing IRS forms. Announcement SVC 2013-12 clarifies and adds numerous obligations for servicers and responsible parties in connection with bifurcated mortgage loans – loans or properties for which the current servicer is not the responsible party for the selling representations and warranties and/or for the prior servicing responsibilities or liabilities. The announcement addresses, among other topics, (i) issuance of repurchase requests and statements, requests for a make whole payment, or requests for indemnification, (ii) remittance of bifurcated repurchase price and appeal process, (iii) hiring of a servicer and a servicer’s failure to comply, (iv) mortgage loan files, record retention, and release of records, and (v) disputes between responsible parties and servicers. All of the policy changes in 2013-12 take effect on September 1, 2013. Announcement SVC 2013-11 describes policy changes regarding (i) processing and applying mortgage loan payments, (ii) obtaining a property valuation for Fannie Mae conventional mortgage loan modifications, and (iii) processing IRS Form 4506-T and Form 4506T-EZ. While servicers are encouraged to implement the changes noted in 2013-11 immediately, servicers are not required to do so until October 1, 2013.

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New York Appellate Division Holds Bond Insurer Can Pursue Repurchase Obligations on Performing Loans

On April 2, the Supreme Court of New York, Appellate Division, held that loans underlying mortgage-backed securities need not be in default to trigger the lender’s repurchase obligations. MBIA Ins. Corp. v. Countrywide Home Loans Inc., No. 602825/2008, 2013 WL 1296525 (N.Y. Sup. Ct. App. Div. Apr. 2, 2013). The trial court granted partial summary judgment in favor of a bond insurer who alleges that a lender (i) fraudulently induced the insurer to insure securitized loans and (ii) breached representations and warranties in the transaction documents. On appeal, the court held that the contract at issue does not require a loan to be in default to trigger the defendant’s repurchase obligation. The court found that the relevant clause requires only that the inaccuracy underlying the repurchase request materially and adversely affect the interest of the insurer. If the insurer can prove that a loan which continues to perform materially and adversely affected its interests, it is entitled to have the lender repurchase the loan. The Appellate Division also (i) affirmed the trial court’s holding that causation is not required under New York insurance law to prevail on a fraud and breach of contract claim, and (ii) determined that the trial court erred in granting summary judgment on the issue of rescissory damages, holding instead that rescission is not warranted in this case.

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Federal District Court Issues First Ever Post-Trial Order Requiring Bank to Reimburse Monoline Insurer over Loans Backing MBS

On February 6, the U.S. District Court for the Southern District of New York found that loans underlying two trusts issued by a Michigan bank breached the representations and warranties in the contracts the bank entered with its bond insurer, and ordered the bank to pay over $90 million, plus interest and attorneys’ fees, to reimburse the insurer for payments made to the bond holders for losses incurred when the loans underlying the trusts defaulted. Assured Guaranty Municipal Corp. v. Flagstar Bank, 11-cv-02375, 2013 WL 440114 (S.D.N.Y. Feb. 6, 2013). The order is the first to impose lender liability for monoline insurer losses based on alleged underwriting defects. The order followed a 12-day bench trial in October 2012 that featured expert testimony presented by the insurer that relied on a statistical sample of the loans in the two pools at issue, and a separate review of certain loan files by the court. The court held that, “despite the unique characteristics of the individual members populating the underlying pool, the sample is nonetheless reflective of the proportion of the individual members in the entire pool exhibiting any given characteristic.” The court then adopted the insurer’s expert’s conclusion that 606 of the 800 loans reviewed were materially defective, while the court determined that the bank was unable to show actual instances where the loan files did not contain material breaches of the underwriting guidelines. Based on the sample loan evidence, the court held that the bank failed to meet its own underwriting requirements in originating the home equity loans that it subsequently pooled and securitized, which eventually defaulted, yielding losses for the insurer. Further, the court held that the bank was made “constructively aware” of the breaches through the insurer’s repurchase demand, yet the bank failed to cure or repurchase.

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Fannie Mae Obtains Comprehensive Settlement of Repurchase Claims Against Major Lender

On January 7, Fannie Mae and a national bank announced a comprehensive settlement to resolve all outstanding and future repurchase requests on nearly all single-family loans originated by the bank (and other lenders it later acquired) over a nine-year period and subsequently delivered to Fannie Mae. The announcement states that the loans had an outstanding unpaid principal balance of $297 billion as of November 30, 2012. Fannie Mae alleges that the lenders breached representations and warranties on the loans. The bank agreed to pay $3.55 billion in cash to Fannie Mae and to repurchase roughly 30,000 loans with cumulative unpaid principal balances and interest of $6.75 billion. On the loans retained by Fannie Mae, the bank remains responsible for certain payment and other obligations with respect to mortgage insurance rescissions, cancellations and denials, as well as its servicing, third-party indemnification, and recourse obligations. Finally, Fannie Mae and FHFA approved the transfer of servicing rights for roughly one million loans from the bank to specialty servicers, which FHFA stated is designed to benefit borrowers and reduce future credit losses to Fannie Mae.

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