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Freddie Mac launches pilot program on loan repurchase alternatives
On January 1, Freddie Mac is launching a pilot program intended to improve the quality of performing loans for sellers. This pilot program, titled “Fee-Based Repurchase Alternative for Performing Loans,” is the fourth initiative from Freddie Mac’s Pilot Transparency programs, which included pilot programs on appraisal modernization, shared equity conversion, and asset and income modeler for direct deposits. This fee-based repurchase alternative pilot program for 2024 focuses on replacing Freddie Mac’s current repurchase policy for defective performing loans. “[L]enders will not be subject to repurchases on most performing loans and will instead be subject to a fee-based structure based on non-acceptable quality (NAQ) rates.” According to Freddie Mac, the fee-based structure will be more efficient and transparent and rewards lenders that deliver high-quality loans. Freddie Mac also notes that loans that are non-performing in 36 months or have life of loan defects could be repurchased. The pilot program is active; accordingly, the fee structure will begin rolling out in early 2024 to targeted lenders.
FHFA Director Outlines Plan To Refine Representation and Warranty Framework
On October 20, FHFA Director Melvin Watt delivered remarks at the Mortgage Bankers Association Annual Conference in Las Vegas, Nevada. Watt addressed the Agency’s progress in ensuring safety and soundness and liquidity in the housing finance market. Specifically, Director Watt focused on the Agency’s continued work to revise the Representation and Warranty Framework (Framework) under which lenders and Enterprises function, stressing the importance of providing “clear rules of the road to allow lenders to manage their risk and lend throughout the Enterprises’ credit box.” In January 2013, the Agency implemented the first improvements to the Framework, which ultimately “relieved lenders of representation and warranties obligations related to the underwriting of the borrower, the property, or the project for loans that had clean payment histories for 36 months;” and in May, the Agency announced additional clarifications on the 36 month benchmark. Now, the Agency is focusing on improving the Framework by (i) clearly defining the life-of-loan exclusions to ensure lenders know what the exclusions are and when the exclusions apply to loans that are eligible for repurchase relief. These exclusions range into six categorical types: 1) misrepresentations, misstatements and omissions; 2) data inaccuracies; 3) charter compliance issues; 4) first-lien priority and title matters; 5) legal compliance violations; and 6) unacceptable mortgage products. Details regarding the definitions of the life-of-loan exclusion types will be released by the Enterprises in the coming weeks; (ii) clarifying that only life-of-loan exclusions can trigger a repurchase; and (iii) adding a “significance” test that requires the Enterprises to “determine that the loan would have been ineligible for purchase initially if the loan information had been accurately reported.” By making these revisions to the Framework, the Agency anticipates that the Enterprises will continue to conduct quality control reviews, enhance their risk management practices, and “engage in transactions that sell a portion of the credit risk from new mortgage purchases to the private market.”
Fannie Mae Offers Alternative To Repurchase For Mortgage Insurance Rescission, Announces Numerous Other Servicing Policy Updates
On July 1, Fannie Mae issued Servicing Guide Announcement SVC-2014-13, which describes a new alternative to repurchase, an “MI stand-in.” The MI stand-in is defined as the full mortgage insurance (MI) benefit that would have been payable under the original mortgage insurance policy if the mortgage loan liquidates. The alternative was first announced earlier this year as part of broader updates to Fannie Mae’ representation and warranties framework. Fannie Mae will not require immediate repurchase when the MI is rescinded on mortgage loans acquired on or after July 1, 2014, and instead will offer the MI stand-in if: (i) the responsible party meets Fannie Mae’s eligibility criteria; and (ii) the only defect Fannie Mae identifies in the mortgage loan is the rescission of MI; or (iii) the responsible party cures all defects identified, except the MI rescission defect, during the required cure period. A mortgage loan will not be eligible for the MI stand-in if: (i) Fannie Mae identifies other defects during the full file quality control review which the responsible party fails to cure during the required cure period, or (ii) the responsible party does not respond in a timely manner or submit all of the required documents within the timeframes required by Fannie Mae. If the responsible party cures the defects that made the mortgage loan ineligible for the MI stand-in, Fannie Mae will review the mortgage loan and responsible party for this alternative to repurchase. On July 9, in Servicing Guide Announcement SVC-2014-14, Fannie Mae announced that servicemembers can use alternatives to Fannie Mae’s form for documenting active duty orders. The announcement also updates policies regarding (i) ordering a property valuation for short sales, Mortgage Releases, and foreclosure sale bidding instructions; (ii) submitting financial statements and reports; and (iii) loan modification monthly principal and interest payment requirements.
Fannie Mae, Freddie Mac Change Representations and Warranties Framework
On May 12, Fannie Mae and Freddie Mac announced numerous changes to the companies’ representations and warranties framework to expand repurchase relief for lenders. As detailed in Fannie Mae Selling Guide Announcement SEL-2014-05 and Freddie Mac Bulletin 2014-08, effective for whole loans purchase on and after July 1, 2014 and for loans delivered into MBS with pool issue dates on and after July 1, 2014, the companies will provide two separate paths for sellers to obtain relief from representations and warranties: (i) based on the borrower’s acceptable payment history; or (ii) based on a satisfactory conclusion of a quality control loan file review. Relief based on an acceptable payment history will be triggered upon the borrower’s 36th monthly payment, as opposed to the current 60th payment. The announcements also detail payment history relief triggers for each company’s refinance loan products. Relief based on a quality control review will be triggered when the company (i) completes the review of the loan file, which includes a review of the credit underwriting and eligibility of the borrower, the property (including its value), and the project in which the property is located, if applicable, and determines that the mortgage is acceptable; (ii) completes the review and determines the mortgage is not acceptable because of a specific, curable, selling deficiency and the lender cures such deficiency; or (iii) completes the quality control loan file review and determines the mortgage is not acceptable but may be eligible for a repurchase alternative which expires or terminates by its terms. In addition, the companies will no longer automatically require loan repurchase when notified that the primary mortgage insurance has been rescinded. Both announcements provide a chart comparing the new relief triggers to those announced in September 2012, and Fannie Mae and Freddie Mac will soon begin providing lenders with reports listing mortgage loans that met the eligibility requirements for relief. Finally, for certain mortgage loans acquired on and after July 1, 2014, the companies will allow lenders to avoid repurchase for termination of primary mortgage insurance by paying the full mortgage insurance claim amount that would have been payable under the original mortgage insurance policy if the mortgage loan liquidates.
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.
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.
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.
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.
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.
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.