FHFA outlines MSR guidance for managing counterparty credit risk
On January 12, FHFA released an advisory bulletin communicating supervisory expectations for Fannie Mae and Freddie Mac (the Enterprises) related to the valuation of mortgage servicing rights (MSRs) for managing counterparty credit risk. FHFA emphasized that Fannie and Freddie’s “risk management policies and procedures should be commensurate with an Enterprise’s risk appetite and based on an assessment of seller/servicer financial strength and MSR risk exposure levels.” FHFA relayed that while sellers and servicers assign values to their MSRs, the Enterprises should implement their own processes to evaluate the reasonableness of seller/servicer MSR values. FHFA explained that Fannie and Freddie are “exposed to counterparty credit risk when seller/servicers provide representations and warranties that mortgage loans conform with its selling guide requirements,” and reiterated that “[f]ailure to meet such obligations and commitments may cause the Enterprise to incur credit losses and operational costs.”
The advisory bulletin lays out risk management expectations to ensure MSR values are reasonable, objective, and transparent, and provides guidance covering several areas, including (i) objective evaluation of MSR values; (ii) MSR valuations for mortgage loans owned or guaranteed by Fannie and Freddie as well as stress testing; (iii) MSR valuations for mortgage loans not owned or guaranteed by Fannie or Freddie; (iv) market data input; (v) use of third-party providers; (vi) frequency of evaluations; and (vii) discount to MSR values when servicing rights are terminated. The advisory bulletin is applicable only to MSRs for single-family mortgage loans and is effective April 1.