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Fannie Mae to issue RFP for Title Acceptance pilot
On April 12, the FHFA announced plans to test a pilot program that would permit lenders to forego a lender’s title insurance policy or an attorney opinion letter for some refinance loans sold to Fannie Mae, aiming to lower closing costs for borrowers. Since the announcement, Fannie Mae has been working with the FHFA to develop a Title Acceptance pilot framework and has received interest from title, settlement service, and technology providers to join the pilot. In light of this, Fannie Mae declared its intention to release a Request for Proposal (RFP) by the end of the second quarter to identify and assess potential suppliers to participate in the pilot.
5th Circuit remands shareholders’ net worth sweep claims to lower court
On March 4, a split U.S. Court of Appeals for the Fifth Circuit, on remand from the U.S. Supreme Court, sent a shareholders’ suit back to the district court for further proceedings consistent with the Supreme Court’s decision in Collins v. Yellen, in which the Supreme Court, relying on its decision in Seila Law LLC v. CFPB, held that FHFA’s leadership structure was unconstitutional because it only allowed the president to fire the FHFA director for cause. (Covered by InfoBytes here.) In Collins, the Supreme Court reviewed the 5th Circuit’s en banc decision stemming from a 2016 lawsuit brought by a group of Fannie Mae and Freddie Mac (GSEs) shareholders against the U.S. Treasury Department and FHFA, in which shareholders claimed that the Housing and Economic Recovery Act of 2008 (Recovery Act), which created the agency, violated the separation of powers principal because it only allowed the president to fire the FHFA director “for cause.” The shareholders also alleged that FHFA acted outside its statutory authority when it adopted a third amendment to the Senior Preferred Stock Purchase Agreements, which replaced a fixed-rate dividend formula with a variable one requiring the GSEs to pay quarterly dividends equal to their entire net worth minus a specified capital reserve amount to the Treasury Department (known as the “net worth sweep”). (Covered by InfoBytes here.) At the time, while the en banc appellate court reaffirmed its earlier decision that FHFA’s structure violated the Constitution’s separation of powers requirements, nine of the judges concluded that the appropriate remedy should be severance of the for-cause provision, not prospective relief invalidating the net worth sweep, stating that “the Shareholders’ ongoing injury, if indeed there is one, is remedied by a declaration that the ‘for cause’ restriction is declared removed. We go no further.”
The split Supreme Court had affirmed the 5th Circuit’s en banc decision regarding the FHFA’s structure, but left intact the net worth sweep and remanded the case to the appellate court to determine “what remedy, if any, the shareholders are entitled to receive on their constitutional claim.” Justice Samuel Alito, who wrote for the majority, stated that “[a]lthough the statute unconstitutionally limited the President’s authority to remove the confirmed Directors, there was no constitutional defect in the statutorily prescribed method of appointment to that office. As a result, there is no reason to regard any of the actions taken by the FHFA in relation to the third amendment as void.”
On remand, the en banc 5th Circuit majority ordered the district court to decide whether the shareholders suffered compensable harm from the unconstitutional removal provision, observing that the Supreme Court left open the possibility that the unconstitutional restriction on the President’s power to remove the FHFA director could have inflicted compensable harm. Noting that the Supreme Court had sketched “possible causes and consequences of such harm along with the Federal Defendants’ denial of any such harm,” the majority stressed that “it became clear” during oral argument that “the prudent course is to remand to the district court to fulfill the Supreme Court’s remand order.”
However, five of the appellate judges dissented from the majority decision on the grounds that nothing in the Supreme Court’s decision precluded the 5th Circuit from deciding the harm issue, pointing out that the appellate court could “easily do so in light of [its] previous conclusion that ‘the President, acting through the Secretary of the Treasury, could have stopped [the Net Worth Sweep] but did not.’” The dissenting judges noted that because the shareholders failed to point to sufficient facts to cast doubt on the 5th Circuit’s previous decision, the appellate court “should modify the district court’s judgment by granting declaratory relief in the Plaintiff’s favor, stating that the ‘for cause’ removal provision as to the Director of the FHFA is unconstitutional. In all other respects, we should affirm.”
FHFA finalizes enterprise regulatory capital framework
On February 25, FHFA announced a final rule, which amends the Enterprise Regulatory Capital Framework (ERCF) by refining the prescribed leverage buffer amount (leverage buffer) and risk-based capital treatment of retained credit risk transfer (CRT) exposures for Fannie Mae and Freddie Mac (collectively, GSEs). Among other things, the final rule: (i) replaces the fixed leverage buffer equal to 1.5 percent of a GSE's adjusted total assets with a dynamic leverage buffer equal to 50 percent of the GSE's stability capital buffer; (ii) replaces the prudential floor of 10 percent on the risk weight assigned to any retained CRT exposure with a prudential floor of 5 percent on the risk weight assigned to any retained CRT exposure; and (iii) removes the requirement that a GSE must apply an overall effectiveness adjustment to its retained CRT exposures in accordance with the ERCF’s securitization framework. Additionally, the final rule implements technical corrections to provisions of the ERCF that were published in December 2020. (Covered by InfoBytes here.) The ERCF amendments and technical corrections will be effective 60 days after publication in the Federal Register.
FHFA re-proposes GSE seller/servicer eligibility requirements
On February 24, FHFA re-proposed updated eligibility standards that Fannie Mae and Freddie Mac (collectively, GSEs) mortgage sellers and servicers would have to meet. The updated proposed requirements are designed to provide transparency and consistency of capital and liquidity requirements for sellers and servicers with different business models, and would differentiate between the servicing of Ginnie Mae mortgages and GSE mortgages. FHFA noted that the updated proposed requirements, which reflect coordination with other federal agencies, also incorporate feedback from a January 2020 proposal (covered by InfoBytes here), as well as lessons learned from the Covid-19 pandemic.
Under the updated proposed requirements, all GSE sellers and servicers (both depositories and non-depositories) would be required to maintain a tangible net worth requirement of $2.5 million, plus 35 basis points of the unpaid principal balance for Ginnie Mae servicing and 25 basis points of the unpaid principal balance for all other 1-to-4 unit residential loans serviced, including GSE loans. Current GSE sellers and servicers, as well as new applicants, will be required to comply with the updated proposed requirements by December 31, 2022, minus the exception that Capital and Liquidity Plan requirements must be submitted to the GSEs by December 31, 2023, and are due annually by the end of each year thereafter. Comments on the proposed changes are due in 60 days. FHFA stated it anticipates finalizing the updated proposed requirements in the second quarter of 2022, with most requirements taking effect six months after finalization.
FHFA issues guidance to GSEs on insider trading
On February 8, the FHFA released AB 2022-01: Insider Trading Risk Management, which provides guidance to Fannie Mae and Freddie Mac (GSEs) on managing insider trading risk and related conflicts of interest. The Bulletin defines illegal insider trading as an individual or entity in possession of material nonpublic information (MNPI), “obtained through their employment or other involvement with a company,” purchasing, selling or otherwise trading their own company’s securities or non-company securities based on MNPI, or “when a person or entity improperly discloses MNPI to a third party.” The Bulletin explains that the GSEs are expected to establish and maintain a compliance program based on risk assessment processes to manage insider trading activities and risks. In order to mitigate these risks, the Bulletin advised the GSEs to “examine the nature of its business and its prior history of insider trading risk events, determine what types of illegal insider trading activities pose the greatest risk, and adopt effective controls to detect and prevent such misconduct.” The Bulletin directs the GSEs to address the following topics: (i) establishing an “effective [corporate] governance framework” for the GSEs; (ii) creating an “effective risk identification and assessment system;” (iii) “identifying, managing, and reporting on insider trading-related controls;” (iv) creating procedures for regular internal surveillance and monitoring of insider trading risks ‘to identify changes or trends in exposures over time;” and (v) developing procedures for effective internal and external disclosures and reporting.
FHFA proposes rule on GSE capital plans
On December 16, FHFA issued a noticed of proposed rulemaking (NPRM) that would require Fannie Mae and Freddie Mac (GSEs) to submit annual capital plans and provide prior notice for certain capital actions, “consistent with the regulatory framework for capital planning for large bank holding companies.” Under the NPRM, the GSEs would be required to assess their risks and submit capital plans to FHFA annually by May 20. These capital plans must include several mandatory elements, including (i) “[a]n assessment of the expected sources and uses of capital over the planning horizon that reflects the [GSE]’s size, complexity, risk profile and scope of operations, assuming both expected and stressful conditions”; (ii) “[e]stimates of projected revenues, expenses, losses, reserves and pro forma capital levels,” along with any additional capital measures the GSEs deem relevant; (iii) “[a] description of all planned capital actions over the planning horizon”; (iv) a discussion of stress test results and how the capital plans will account for these results; and (iv) a discussion of any anticipated changes to a GSE’s business plan that may likely have a material impact on the GSE’s capital adequacy or liquidity. FHFA stated that it intends to review the capital plans for comprehensiveness, reasonableness, and relevant supervisory information, and plans to review the GSEs’ regulatory and financial reports, as well as the results of any conducted stress tests and any other information required by FHFA or related to the GSEs’ capital adequacy. Should the GSEs determine that there has been or will be a material change to their risk profile, financial condition, or corporate structure since the submission of the last plan (or if directed by FHFA), they must resubmit their capital plans within 30 days. The NPRM also incorporates the determination of the stress capital buffer into the capital planning process, which will be provided to the GSEs by August 15 of each year, along with an explanation of the results of the supervisory stress test. Comments on the NPRM are due within 60 days of publication in the Federal Register.
FHFA makes GSE desktop appraisals permanent, expands refinance programs for LMI borrowers
On October 18, FHFA announced two measures to advance housing sustainability and affordability. Speaking before the 2021 Mortgage Bankers Association Annual Convention and Expo, acting Director Sandra Thompson announced that Fannie Mae and Freddie Mac (GSEs) “will incorporate desktop appraisals into their guides for many new purchase loans starting in early 2022.” Thompson explained that including desktop appraisals in the selling guides will change what was a temporary flexibility into an option that will “mitigate risk for use over the long-term” and will “become an established option for originating [GSE] loans.” According to Thompson, this certainty should allow lenders, borrowers, and appraisers to take advantage of efficiency gains provided through desktop appraisals.
Thompson also announced that the GSEs will expand their refinance programs for low- and moderate-income borrowers that were introduced last year. Several enhancements will be made to the RefiNow and RefiPossible programs to expand eligibility requirements and make the programs easier for lenders to offer. Thompson noted that income threshold for eligible borrowers will be raised from 80 percent of area median income to 100 percent. Additionally, the GSEs are making other modifications to reduce operational frictions for lenders.
8th Circuit lets GSE shareholders seek retrospective relief
On October 6, the U.S. Court of Appeals for the Eighth Circuit held that Fannie Mae and Freddie Mac shareholders have standing to seek retrospective, but not prospective, relief related to their claims that they suffered damages as a result of the FHFA’s leadership structure. The shareholders alleged FHFA’s leadership structure and appointments violated the appointments clause, the separation of powers, and the non-delegation doctrine. Among other things, the shareholders claimed that (i) the Housing and Economic Recovery Act (Recovery Act), which created the agency, violated separation of powers principles because it only allowed the president to fire the FHFA director “for cause,” and (ii) FHFA acted outside its statutory authority when it adopted a third amendment to the Senior Preferred Stock Purchase Agreements, which replaced a fixed-rate dividend formula with a variable one requiring the GSEs to pay quarterly dividends equal to their entire net worth minus a specified capital reserve amount to the Treasury Department (known as the “net worth sweep”). The district court dismissed the claims for lack of standing, and in the alternative, rejected them on the merits.
The 8th Circuit began by rejecting the district court’s holding that the shareholders lacked standing. Relying on the U.S. Supreme Court’s recent ruling in Collins v. Yellen (covered by InfoBytes here), the appellate court held that the shareholders’ alleged injury flowed from the adoption of the agreement containing the net worth sweep by FHFA’s acting director, who did not properly hold office. However, the shareholders were limited to seeking retrospective relief, because prospective relief was mooted by the adoption of subsequent amendments to the agreement by validly-appointed directors.
However, the appellate court went on to hold that the shareholders were not entitled to relief based on their argument that the acting director had been in office too long in an “acting” role when he adopted the agreement. Even if the shareholders were correct, the acting director’s decisions were valid under the de facto officer doctrine, which confers validity on the acts of persons operating “under the color of official title even though it is later discovered that the legality of that person’s appointment or election to office is deficient.” Moreover, even if the de facto officer doctrine did not control, “[a]ny defect was resolved when the subsequent FHFA directors—none of whose appointments were challenged—ratified the third amendment.”
The 8th Circuit also rejected the argument that Congress unlawfully delegated authority to FHFA in the Recovery Act, finding that the statute directs FHFA “to act as a ‘conservator,’ with clear and recognizable instructions.”
Finally, the 8th Circuit did agree with the shareholders that FHFA’s leadership structure was unconstitutional because, as the Court held in Collins, it limited the president’s ability to remove the director. But the appellate court rejected the shareholders’ request that it vacate the adoption of the agreement containing the net worth sweep as a result, noting that the acting director was always “removable at will,” and that there was no allegation that subsequent agency directors (who took actions to implement the agreement) were appointed improperly. Still, the appellate court noted that, in Collins, the Court had remanded the case for a determination whether the constitutional violation “caused compensable harm” to the plaintiffs, and it did the same here.
FHFA seeks comments on regulatory capital framework
On September 15, FHFA issued a notice requesting public comment on a proposed rule that would amend the regulatory capital framework for Fannie Mae and Freddie Mac (collectively, “GSEs”). The proposed rule would amend the prescribed leverage buffer amount (PLBA) and the capital treatment of credit risk transfers (CRT) to encourage more distribution of credit risk between the GSEs and private investors. Specifically, FHFA is proposing to: (i) change the fixed PLBA equal to 1.5 percent of a GSE’s adjusted total assets to a dynamic PLBA of 50 percent of the GSE’s stability capital buffer; (ii) “replace the prudential floor of 10 percent on the risk weight assigned to any retained CRT exposure with a prudential floor of 5 percent on the risk weight assigned to any retained CRT exposure”; and (iii) eliminate the requirement that a GSE is required to apply an overall effectiveness adjustment to its retained CRT exposures in line with the framework’s securitization framework. Comments on the proposal must be submitted within 60 days of publication in the Federal Register.
Treasury, FHFA suspend provisions of 2021 PSPAs
On September 14, the U.S. Treasury Department and FHFA announced the suspension of certain requirements that were added on January 14 to the Preferred Stock Purchase Agreements (PSPAs) between Treasury and Fannie Mae and Freddie Mac (collectively, “GSEs”). According to the announcement, “FHFA will continue to measure, manage, and monitor the financial and operational risks of the Enterprises to ensure that they operate in a safe and sound manner and consistent with the public interest.” In addition, during the suspension, the FHFA will review the requirements and consider other revisions, and notes that the suspensions “do not affect the [GSEs] ability to build or retain capital.”