InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FHFA Finalizes Five Year Plan
On October 9, the FHFA released a final five year strategic plan for its oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (the GSEs). The plan sets four strategic goals: (i) safe and sound housing GSEs, (ii) stability, liquidity, and access in housing finance, (iii) preservation and conservation of Fannie Mae and Freddie Mac assets, and (iv) preparing for the future of housing finance in the U.S. For each strategic goal, the plan establishes several “means and strategies.” The strategies include several steps the FHFA already is taking, including its ongoing efforts to enhance the use of short sales, promote sound underwriting, and set guarantee fees based on actual risk, as well as its recently released proposal to build a new infrastructure for the secondary market. While the FHFA sought and received comments on the draft version of its strategic plan, it did not identify any such comments as being incorporated in the final document, though it did note that comments may be considered again during the design and implementation of the programs intended to carry out the strategic plan.
FHFA Proposes New Secondary Market Infrastructure
On October 4, the FHFA released a white paper describing the framework for a new mortgage securitization platform and a model Pooling and Servicing Agreement. The proposed changes are part of a larger program to align and improve Fannie Mae’s and Freddie Mac’s (the Enterprises) business practices. Consistent with that program, the new platform would replace the proprietary structures used by the Enterprises with a more efficient common platform. Additionally, it would include certain enhancements and new capabilities. The proposed securitization platform would (i) facilitate broader sharing of credit risk, (ii) perform services related to the issuance and administration of mortgage-backed securities, (iii) be adaptable to policy changes and emerging technologies, and (iv) have an open architecture to drive interoperability. The model Pooling and Servicing Agreement would leverage the existing structures used by the Enterprises and, in doing so, would establish basic contractual requirements for pooling and selling and for the MBS/PC Trust. The FHFA seeks industry comment on the proposed framework, including responses to specific questions posed in the white paper. Comments must be submitted by December 3, 2012 and will be posted for public review.
Fannie Mae and Freddie Mac Align Certain Servicing Policies
On October 3, Fannie Mae and Freddie Mac (the Enterprises) issued announcements reflecting their recent effort to comply with an FHFA directive that the Enterprises work together to harmonize certain of their servicing policies and develop a consistent framework for assessing servicer performance. For example, Fannie Mae’s Servicing Guide Announcement SVC-2012-21 and Freddie Mac’s Bulletin 2012-20 include revisions to the Enterprises’ policies and practices regarding performance metrics for assessing servicers’ fulfillment of their duties. The Enterprises also updated servicing policies to harmonize (i) compensatory fee structures, (ii) servicer violations and remedies, and (iii) servicing terminations and transfer of servicing. The effective date of most changes discussed in the announcements is January 1, 2013. However, Fannie Mae announced miscellaneous contractual changes that are effective immediately, including its adoption of New York law as its choice of law provision, and its clarification of certain Servicing Guide sections related to indemnification and electronic records.
NY AG Files First RMBS Working Group Action, Expects More to Follow
On October 2, the Residential Mortgage-Backed Securities (RMBS) Working Group announced its first legal action. The civil complaint, filed against a major bank by New York Attorney General Eric Schneiderman on behalf of the people of that state, alleges that an underwriter acquired by the bank made fraudulent misrepresentations and omissions in the sale of RMBS to investors. The suit claims that losses resulting from the allegedly fraudulent sales total approximately $22.5 billion to date, but the complaint does not specify the damages sought. In announcing the suit, Attorney General Schneiderman, as well as Acting U.S. Associate Attorney General Tony West and other federal Working Group members, described the coordinated efforts that culminated in this filing. Specifically, Working Group members stressed the assistance provided by the SEC and the FHFA. Indeed, the allegations in the New York Attorney General’s complaint are similar to allegations previously made by the FHFA on behalf of Fannie Mae and Freddie Mac against numerous financial institutions. The allegations also parallel those made by private plaintiffs. On behalf of the RMBS Working Group, which was first announced by President Obama during his 2012 State of the Union address, Mr. Schneiderman has promised more civil, and potentially criminal, enforcement activity against other financial institutions.
FHFA IG Clears Freddie Mac's Use of Inverse Floating-Rate Bonds
On September 26, the FHFA Inspector General (IG) reported that neither Freddie Mac nor the FHFA purposefully limited refinancing opportunities to influence the yields of Freddie Mac inverse floating-rate bonds (inverse floaters). Inverse floaters are a by-product of other variable rate bonds carved out of Freddie Mac’s securitized mortgages to capitalize on increasing investor demand. Because the value of inverse floaters decreases when the underlying mortgages are refinanced, U.S. lawmakers and others argued that inverse floaters created a conflict of interest for Freddie Mac’s investment and refinancing policies because Freddie Mac could intentionally limit refinances to protect the value of its retained inverse floaters. The FHFA IG reviewed the practice and Freddie Mac’s portfolio and determined that (i) inverse floaters represent a small portion of Freddie Mac’s capital markets portfolio, (ii) inverse floaters pose no greater conflict than do any other mortgages held by Freddie Mac, and (iii) Freddie Mac employs an “information wall” to prevent the use of nonpublic information—including information about refinancing activity—from being used in investment decisions.
FHFA Proposes State-Level Guarantee Fee Pricing
On September 25, the FHFA published a notice and request for comment on its proposal to set risk-based guarantee fees by state. The proposal identifies five states—Connecticut, Florida, Illinois, New Jersey, and New York—that have substantially higher default-related costs than the national average. The proposed methodology for state-level guarantee fees considers three factors (i) the number of days it takes Fannie Mae or Freddie Mac to obtain marketable title, (ii) the average per-day carrying cost incurred by Fannie Mae or Freddie Mac, and (iii) the national average default rate on single-family mortgages. The FHFA is proposing to charge lenders an upfront fee of between fifteen and thirty basis points on each new mortgage originated in the five higher-cost states, beginning in 2013. The actual increase in the upfront fee would vary for each state, depending on default data in the state and the state’s deviation from the mean of the state-level estimates of expected total default-related carrying costs. The proposed approach is based on the expected costs of defaults on mortgages acquired by Fannie Mae and Freddie Mac in the future given current underwriting standards, rather than actual default losses realized over the past decade. The FHFA also states that its methodology for determining increased state-level fees could change in the future to consider other factors, including the impact of recently-enacted laws and ordinances or a wider range of state actions. The FHFA has asked for comments on the proposal by November 26, 2012.
FHFA Inspector General Publishes Two Reports
On September 18, the Inspector General (IG) for the FHFA published a report on the FHFA’s oversight of management of high-risk sellers and servicers by Fannie Mae and Freddie Mac (the Enterprises). The high-risk seller/servicer report presents a review of the Enterprises’ high risk counterparties and noted that more than 300 are on the Enterprises’ watch lists while more than forty have been blocked from doing business with the Enterprises. To better manage counterparty risk, the IG recommends that the FHFA promulgate standards for the Enterprises to develop contingency plans for handling a large seller/servicer’s failure, and that the FHFA finalize its proposed guidance for FHFA examiners to use in assessing the Enterprises’ contingency plans.
On the same day, the FHFA IG published a report regarding Fannie Mae’s purchase and transfer of certain mortgage servicing rights on approximately 384,000 loans for roughly $512 million. The IG determined that the amount paid was consistent with other such purchases made as part of a Fannie Mae program through which Fannie Mae transferred mortgage servicing rights from a regular servicer to a specialty servicer. While it determined that Fannie Mae did not overpay for the servicing rights in context, the IG recommended that the FHFA (i) consider requiring the Enterprises to seek approval for high costs initiatives, (ii) ensure additional scrutiny of pricing of future significant servicing transactions, (iii) reevaluate the Fannie Mae transfer program, and (iv) follow through with Fannie Mae’s implementation of prior FHFA directions regarding the purchase and transfer of mortgage servicing rights.
House Member Introduces Eminent Domain Bill
Recently, Representative John Campbell (R-CA) introduced a bill, H.R. 6397, that would prohibit Fannie Mae and Freddie Mac from buying mortgages originated in localities that employ eminent domain to rescue borrowers from their underwater mortgages by seizing the loans and selling them to private investors to be restructured. The FHFA currently is considering its options for responding potential action by localities absent legislative intervention.
FHFA, Fannie Mae, and Freddie Mac Implement New Representation and Warranty Framework
On September 11, the FHFA announced that Fannie Mae and Freddie Mac (the GSEs) are implementing a new representation and warranty framework for all conventional loans sold or delivered to the GSEs on or after January 1, 2013. As detailed in subsequent announcements from the GSEs, including Fannie Mae Selling Guide Announcement SEL-2012-08, Fannie Mae Lender Letter LL-2012-05, Freddie Mac Bulletin 2012-18, and a Freddie Mac Industry Letter, the new framework is designed to improve the GSE loan review process and to clarify lenders' repurchase exposure. With regard to loan review, under the new framework, (i) GSE reviews will generally be conducted between 30 and 120 days after loan purchase, (ii) the GSEs will have consistent timelines for submission of loan file review requests, (iii) loan file evaluation will be more comprehensive and will leverage data from tools currently used by the GSEs, and (iv) the repurchase request appeals process will be made more transparent. For lenders, the new framework will provide relief from certain repurchase obligations for loans that meet specific payment requirements, including for loans with 36 consecutive months of timely payments and HARP loans with a twelve-month acceptable payment history. Lenders will receive additional detailed information about exclusions from this new representation and warranty relief.
FHFA Outlines Next Steps for Conservatorship, Announces Close of First REO Pilot Purchase
On September 10, FHFA Director Edward DeMarco, in a speech made to an industry conference, provided a progress report on his agency's role as conservator for Fannie Mae and Freddie Mac and outlined several next steps the conservator will take to alter the GSEs' operations in the mortgage market. Further to the FHFA's recent increases of guarantee fees, Mr. DeMarco announced that the FHFA plans to release a paper outlining a pricing approach that would better capture the costs associated with state and local policies by imposing an upfront fee on newly acquired single-family mortgages originated in states where default-related costs are higher than the national average. The FHFA plans to seek public comment on the proposal. In addition, Mr. DeMarco provided an update on the FHFA's work, with Fannie Mae and Freddie Mac, to develop a shared securitization platform. This secondary market infrastructure project, which was announced earlier this year and is expected to take multiple years to build and implement, is being designed not only to serve Fannie Mae and Freddie Mac while in conservatorship, but also a broader multiple-issuer market post-conservatorship. The infrastructure would include new standards for a variety of contractual agreements, including a model pooling and servicing agreement. The FHFA plans to issue a white paper on the platform in October and will seek public input. Also announced as part of the speech, as well as in a separate FHFA release, was the FHFA's completion of the first sale of REO properties in the pilot program through which the FHFA is selling foreclosed properties to be transitioned into rental housing.