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FHFA pauses credit score initiative, will use formal rulemaking to create new credit score model
On July 23, the Federal Housing Finance Agency (FHFA) announced that it will not decide this year whether to update the credit score model used by Fannie Mae and Freddie Mac (the Enterprises), as previously announced. Instead, FHFA will focus on implementing Section 310: Credit Score Competition, of the Economic Growth, Regulatory Relief, and Consumer Protection Act (Public Law 115-174) (the Act). Section 310 requires FHFA to establish, through the rulemaking process, standards and criteria to govern the verification and validation of credit score models used by the Enterprises. According to the press release, prior to Section 310 becoming law, FHFA and the Enterprises had been engaged in an ongoing initiative to evaluate a new credit score model’s potential impact on “access to credit, safety and soundness, operations in the mortgage finance industry, and competition in the credit score market.” However, after Section 310 was enacted in May, FHFA “determined that proceeding with efforts to reach a decision based on our [initiative] and timetable would be duplicative of, and in some respects inconsistent with, the work we are mandated to do under Section 310 of the Act. In light of that, we are communicating to Congress that we are transferring our full efforts to working with the Enterprises to implement the steps required under Section 310.” FHFA will release a proposed rule open for public comment in the future to govern the verification of credit score models.
Fannie Mae and Freddie Mac issue disaster relief policy reminders and updates
On July 18, Fannie Mae, in Lender Letter LL-2018-04, and Freddie Mac, in an industry letter released the same day, reminded servicers of requirements that continue to be in effect for servicing mortgages impacted by eligible disasters. Specifically, Fannie Mae provides information on (i) reimbursements related to insured loss repair inspection costs; (ii) disaster-impacted inspections; (iii) the Extend Modification for Disaster Relief policy—developed in conjunction with Freddie Mac for post-disaster forbearance mortgage loan modifications; and (iv) the disbursement of hazard loss draft proceeds. Freddie Mac also reminds servicers of property inspection reimbursement requirements and changes to insurance loss settlement distributions.
Find continuing InfoBytes coverage on disaster relief here.
Fannie Mae updates borrower-initiated mortgage insurance termination requirements
On July 18, Fannie Mae released Lender Letter LL-2018-03 (Letter) to provide updates to requirements for single-family servicers related to borrower-initiated conventional mortgage insurance (MI) termination requests. The Letter covers requirements for borrower-initiated MI terminations and outlines various processes for verifying current property values. Among other things, the Letter also incorporates into the Servicing Guide changes previously announced in LL-2017-09 (see previous InfoBytes coverage here), which allows for temporary forbearance mortgage loan modification for servicers with mortgage loans affected by recent disasters. Fannie Mae encourages servicers to implement the new requirements on January 1, 2019, but will not require them to do so until March 1, 2019, unless otherwise noted.
5th Circuit rules FHFA structure violates Constitution’s separation of powers
On July 16, in a divided opinion, the U.S. Court of Appeals for the 5th Circuit affirmed in part and reversed in part a lower court’s decision that addressed two claims brought by a group of Fannie Mae and Freddie Mac (government-sponsored entities or GSEs) shareholders: (i) whether the Federal Housing Finance Agency (FHFA) acted within its statutory authority when it adopted a dividend agreement, which requires the GSEs to turn over every quarter “dividends equal to their entire net worth” to the Treasury Department; and (ii) whether the structure of the FHFA is unconstitutional and in violation of the separation of powers. The lower court previously dismissed the shareholder’s statutory claims and granted summary judgment in favor of the Treasury Department and the FHFA on the constitutional claim. In addressing the first claim, the appellate court agreed with the lower court and found the government-sponsored entities’ payments acceptable under the agency’s statutory authority and that the FHFA was lawfully established by Congress through the Housing and Economic Recovery Act of 2008, which places restrains on judicial review. However, the appellate court reversed the lower court’s decision as to the second claim and agreed with shareholders that Congress went too far in insulating the FHFA’s single director from removal by the president for anything other than cause, ruling that the agency’s structure violates Article II of the Constitution. “We hold that Congress insulated the FHFA to the point where the Executive Branch cannot control the FHFA or hold it accountable,” the opinion stated. The divided appellate panel remanded to the lower court for further proceedings.
Earlier this year, in response to a challenge to the CFPB's single-director structure, the U.S. Court of Appeals for the D.C. Circuit en banc upheld the CFPB’s constitutionality in a 7-3 decision (see Buckley Sandler Special Alert). The 5th Circuit is also scheduled to hear a challenge by two Mississippi-based payday loan and check cashing companies to the constitutionality of the CFPB’s single-director structure, in which 14 state Attorney General filed an amici curiae brief encouraging the appellate court to disagree with the en banc decision of the D.C. Circuit. (See previous InfoBytes coverage here and here.)
Fannie Mae updates Reverse Mortgage Loan Servicing Manual
On July 11, Fannie Mae issued RVS-2018-02, which updates the Reverse Mortgage Loan Servicing Manual to include changes related to REO Hazard Insurance Coverage Requirements for Home Equity Conversion Mortgage (HECM) mortgages. Specifically, the update requires a servicer to place a property insurance policy on acquired property up to the HUD foreclosure appraisal amount or deed-in-lieu property valuation amount, in accordance with HUD guidelines. If the servicer is unable to obtain either of these valuation amounts, the servicer must place coverage up to the unpaid principal balance amount. Servicers are required to implement the changes no later than October 1 for new and existing HECM properties in REO inventory.
Fannie Mae announces Enterprise-Paid Mortgage Insurance Pilot
On July 10, Fannie Mae announced the Enterprise-Paid Mortgage Insurance (EPMI) pilot program, which offers an alternative to the standard borrower-paid mortgage insurance and lender-paid mortgage insurance options offered by private mortgage insurance companies. The EPMI program will allow lenders to deliver Fannie Mae a loan with a greater than 80 percent loan-to-value without lender-acquired private mortgage insurance as long as the lender pays a loan-level price adjustment fee. The EPMI option would then cover the loan under a forward insurance arrangement, which is acquired by Fannie Mae. Fannie Mae would also be responsible for filing the insurance claims and performing monthly reporting.
The initial roll-out was offered to “a diverse, representative cross-section of large, medium, and small lenders” and is subject to a volume limit. Participating lenders may begin delivering EPMI loans to Fannie Mae on or after August 1.
International bank must maintain $500 million bond securing $806 million RMBS judgment
On July 5, the U.S. District Court for the Southern District of New York issued a memorandum opinion and order stating that an international bank must maintain the $500 million bond it had filed in 2015 to secure $806 million in damages owed to the Federal Housing Finance Agency for selling allegedly faulty residential mortgage-backed securities to Fannie Mae and Freddie Mac. The court had stayed execution of the judgment pending appeal, and the stay expired on July 5, following the Supreme Court’s denial without comment of the bank’s petition for writ of certiorari. (See previous InfoBytes coverage here.) According to the district court opinion and order, the bank maintained that the stay order required the bond to remain in effect only through July 5, even though the bank was not required to pay the final judgment until July 20. The court disagreed, explaining that a “more natural reading of the [s]tay [o]rder and the [b]ond together is that the [b]ond must remain in place until two conditions are met: (1) the stay of execution ends and (2) the [f]inal [j]udgment is satisfied. Condition 1 has now been met, but not condition 2.” The court added that the bank is free to satisfy the final judgment prior to its July 20 due date, at which point the bond could be dissolved prematurely.
Supreme Court rejects review of $806 million RMBS judgment
On June 25, the Supreme Court denied without comment an international bank’s petition for writ of certiorari to challenge the $806 million in damages awarded by the Federal Housing Finance Agency (FHFA) for selling allegedly faulty mortgage-backed securities to Fannie Mae and Freddie Mac. As previously covered by InfoBytes, in September 2017, the U.S. Court of Appeals for the 2nd Circuit affirmed the New York District Court’s ruling requiring the $806 million payment. Both lower courts concluded that the marketing prospectus used to sell the mortgage securities to Fannie and Freddie between 2005 and 2007 contained “untrue statements of material fact,” including false statements regarding the underlying loans’ compliance with underwriting standards related to the creditworthiness of borrowers and appraisal value of the properties.
White House proposes to fully privatize GSEs in broad government reorganization plan
On June 21, the White House announced a government reorganization plan titled, “Delivering Government Solutions in the 21st Century: Reform Plan and Reorganization Recommendations.” The plan covers a wide-range of government reorganization proposals, including several related to the federal government’s involvement in mortgage finance. Among other things, the White House is proposing to end the conservatorship of Fannie Mae and Freddie Mac (GSEs) and fully privatize the companies. The plan notes that a “[f]ederal entity with secondary mortgage market experience would be charged with regulatory oversight” of the GSEs, but does not state whether this would be done by the Federal Housing Finance Agency (FHFA), the GSEs current primary regulator. According to the proposal, this structure would ensure the government’s role “is more transparent and accountable to taxpayers,” as HUD would assume the primary responsibility for affordable housing, and the GSEs would solely focus on secondary market liquidity.
Freddie Mac and Fannie Mae release updates to servicing guides
On June 13, Freddie Mac released Guide Bulletin 2018-9, which among other things, updates servicer requirements for short-term, long-term, and unemployment forbearance plans and consolidates the offerings into a single plan. Effective December 1, the streamlined plan will allow servicers to approve forbearance plans lasting up to six months without requiring eligible borrowers to submit a Borrower Response Package. Servicers may also offer consecutive forbearance plans that do not exceed 12 months in total to qualifying borrowers. Separately, the Bulletin includes the introduction of Freddie Mac’s NextJob re-employment services company designed to serve high-needs areas and provide job search skills and training for unemployed or underemployed borrowers who have requested loss mitigation assistance.
On the same day, Fannie Mae updated its Servicing Guide to consolidate and simplify its forbearance policies into a single plan, and encouraged servicers to implement the changes immediately, but no later than December 1. Fannie Mae clarified, however, that forbearance plans “entered into prior to the servicer’s implementation would adhere to existing policy until the expiration of such forbearance plan.” Additional changes to the Servicing Guide include: (i) clarifications to the escrow advances reimbursement policy for real estate taxes and flood/property insurance premiums; and (ii) updates to be implemented by August 1 for when servicers are required to notify Fannie Mae that a mortgage loan has been placed under military indulgence.