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D.C. Circuit: Investors Can’t Challenge Agreement Distributing Fannie/Freddie Net Worth to Treasury
On February 21, the U.S. Court of Appeals for the District of Columbia Circuit held that stockholders of Fannie Mae and Freddie Mac (the Companies) could not challenge dividend-allocating terms that FHFA negotiated on behalf of the Companies because the Housing and Economic Recovery Act (HERA) strictly limits judicial review of actions authorized thereunder. Perry Capital LLC v. Mnuchin, No. 14-5243, 2017 WL 677589 (D.C. Cir. Feb. 21, 2017).
In 2008, Fannie and Freddie were placed into conservatorship with FHFA, which then entered into a stock purchase agreement with Treasury to obtain emergency capital for Fannie and Freddie. In exchange, Treasury received preferred shares of stock from Fannie and Freddie that provided for a quarterly dividend of 10 percent of the total funds drawn from Treasury. After Fannie and Freddie began routinely borrowing from Treasury to pay the dividends, FHFA and Treasury amended the stock purchase agreement in 2012 so that repayment would be based on the Companies’ profits rather than mandatory dividends. The stockholder-plaintiffs in this action sought to challenge the 2012 amendment–in particular, arguing that the 2012 amendment exceeded the authority granted to FHFA under HERA and constituted “arbitrary and capricious conduct” in violation of the Administrative Procedure Act. One class of stockholders also argued that the amendment constituted a breach of fiduciary duty and certain terms and covenants of the Companies’ stock certificates. The district court had dismissed both complaints on the motions of FHFA and Treasury.
The D.C. Circuit opinion noted that Section 4617(f) of HERA expressly states that “no court may take any action to restrain or affect the exercise of powers or functions of the Agency as a conservator or a receiver.” The court interpreted this language to prohibit any court from “wielding [its] equitable relief to second-guess either the dividend-allocating terms . . . or FHFA’s business judgment.” And although an exception to this bar on judicial review has been recognized where an agency is found to have exceeded or violated its statutory powers or functions, the court determined that FHFA’s actions were within its statutory powers or functions.
Although the majority of the stockholders’ claims were rejected, the stockholders’ contract-based claims regarding liquidation preferences and dividend rights were remanded to the district court for further proceedings.
FHFA Seeks Public Comment on Criteria for Evaluating Banks Subject to Review Under FHLB Community Support Program
In connection with its 2017 biennial review of all FHLB members under FHFA’s community support requirements regulation, FHFA is seeking public comment on the community support requirements regulation that establishes standards a FHLB member must meet in order to maintain access to long-term advances. The regulation also establishes review criteria that the FHFA must apply in evaluating a member’s’ Community Reinvestment Act performance and their record of lending to first-time homebuyers. Comments must be submitted to the agency by March 31.
FHFA Finalizes Amendments to Regulations Governing FHLBs' Acquired Member Asset Programs
On December 19, the FHFA published a final rule modifying, reorganizing and relocating the current regulation governing the Federal Home Loan Banks’ (FHLBs) Acquired Member Asset (AMA) programs. As required by the Dodd-Frank Act, the final rule removes and replaces references in the current regulation to ratings issued by a Nationally Recognized Statistical Ratings Organization. The rule also provides the FHLBs with greater flexibility in choosing a model for estimating the credit enhancement required for AMA loans. The final rule adds a provision allowing an FHLB to authorize the transfer of mortgage servicing rights on AMA loans to any institution, including a non-member of the FHLB System. The new rule also allows FHLBs to acquire mortgage loans that exceed the conforming loan limits where such loans are guaranteed or insured by a department or agency of the U.S. government. The final rule excludes a proposed provision that would have eliminated the use of private, loan-level, supplemental mortgage insurance in the member credit enhancement structure required for the AMA programs, but the final version does require FHLBs to establish financial and operational standards that insurers must meet before offering insurance on AMA loans. The new final rule goes into effect on January 18, 2017.
Also on December 19, FHFA issued another final rule (i) limiting the scope of “business activities” that would trigger an FHLB’s obligation to file a “new business activity” notice, (ii) modifying the submission requirements, and (iii) establishing new timelines for agency review and approval of such notices. The rule “narrows the scope of the [new business activity] regulation in two ways: (1) By limiting it to activities that introduce new material risks to the [FHLB]; and (2) By eliminating the need to file an NBA notice prior to accepting new types of collateral.” This new rule similarly goes into effect on January 18, 2017.
New FHFA Rule Requires Fannie Mae and Freddie Mac to Submit Underserved Markets Plan
FHFA published a final rule in the December 18 Federal Register implementing certain “Duty to Serve” provisions of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008. Among other things, these provisions require that Fannie Mae and Freddie Mac adopt formal plans to improve the availability of mortgage financing in a “safe and sound manner” for residential properties that serve “very low-, low-, and moderate-income families” in three specified underserved markets: manufactured housing, affordable housing preservation, and rural markets. FHFA’s new rule addresses this obligation by requiring both Fannie Mae and Freddie Mac to submit to FHFA a three-year “Underserved Markets Plan” that describes the activities and objectives they will undertake to meet their Duty to Serve requirements. The Plans will become effective January 2018, after which time, the new rule requires further that FHFA annually evaluate, rate, and report to Congress each Enterprise's compliance with its Duty to Serve obligations as required by the statute.
FHFA Increases Conforming Loan Limits for 2017
Last week, on November 23, the FHFA announced that it will raise the maximum conforming loan limits for mortgages purchased by Fannie Mae and Freddie Mac in 2017 from $417,000 to $424,000. The announcement marks the first time FHFA has increased the baseline loan limit since 2006. In high-cost areas, such as Los Angeles, New York, San Francisco, and Washington, D.C., the maximum loan limit will be $636,150. Meanwhile, limits rose in all but 87 counties in the country. View the list of counties seeing increases here.
FHFA: No Increase on Multifamily Loan Caps for GSEs
On November 22, FHFA announced that Fannie Mae and Freddie Mac’s caps for multifamily lending will remain at $36.5 billion for 2017. The determination was based on the agency’s projection that the overall size of the multifamily finance market will remain roughly the same as it was in 2016. Multifamily loans in designated affordable and underserved segments will remain excluded from the caps.
FHFA Announces New Refinance Offering for High LTV Borrowers; Extends HARP through September 2017
On August 25, FHFA announced that the GSEs will implement a new refinancing offering for borrowers having high LTVs who meet certain criteria. The new offering contains a number of similarities to the Home Affordable Refinance Program (HARP), including not subjecting eligible borrowers to a minimum credit score, not establishing a maximum debt-to-income ratio or maximum LTV, and often not requiring an appraisal. Dissimilarities from HARP include not imposing eligibility cut-off dates and allowing borrowers to use the offering more than once to refinance their mortgage. Borrowers will not have access to the new offering until October 2017. As such, the FHFA directed the GSEs to extend HARP through September 30, 2017, ensuring that “high LTV borrowers who are eligible for HARP will not be without a refinance option while the new refinance offering is being implemented."
CFPB Issues Principles for the Future of Loss Mitigation
On August 2, the CFPB released consumer protection principles for mortgage servicers to use as they develop new foreclosure relief solutions in anticipation of Treasury’s Home Affordable Modification Program’s (HAMP) upcoming expiration date (CFPB Principles). The CFPB Principles echo those summarized in FHFA’s, HUD’s, and Treasury’s recently published white paper, “Guiding Principles for the Future of Loss Mitigation: How the Lessons Learned from the Financial Crisis Can Influence the Path Forward.” As previously covered in InfoBytes, the white paper recommends that future loss mitigation programs promote accessibility, affordability, sustainability, transparency, and accountability. The CFPB Principles address accessibility, affordability, sustainability, and transparency, and cite to separate CFPB mortgage servicing rules for standards concerning accountability. In its press release, the CFPB notes that the four principles “do not establish binding legal requirements but instead are intended to complement ongoing discussions among industry, consumer, groups, and policymakers.”
Agencies Issue White Paper Regarding Loss Mitigation Programs
On July 25, FHFA, HUD, and Treasury published a white paper titled “Guiding Principles for the Future of Loss Mitigation: How the Lessons Learned from the Financial Crisis Can Influence the Path Forward.” The paper examines the effect of the 2008 financial crisis on the mortgage servicing industry with a focus on loss mitigation programs. Under the 2009 Making Home Affordable (MHA) program, foreclosure alternatives were established to address the needs of homeowners and to improve the mortgage servicing industry’s loss mitigation practices. According to the paper, between April 2009 and the end of May 2016, 10.5 million modification and mortgage assistance arrangements were completed through government programs and private sector efforts. The paper further notes that, as a result of FHFA’s, HUD’s, and Treasury’s programs, regulatory actions, and private sector initiatives, the mortgage industry is “generally better prepared now to provide assistance to struggling homeowners than it was before the crisis.” The improvement “is due, in part, to the adoption of certain homeowner engagement standards including continuity of contact, solicitation timeframes, and certain notice and appeal processes required by the [CFPB].” At the end of 2016, MHA programs, such as HAMP, will come to a close. Based on the agencies’ collective experience with MHA programs, the paper identifies five guiding principles for loss mitigation programs: (i) accessibility, guaranteeing homeowners a simple process for obtaining mortgage assistance; (ii) affordability, “providing homeowners with meaningful payment relief that addresses the needs of the homeowner, the servicer and the investor, to support long-term performance”; (iii) sustainability, offering long-term solutions intended to resolve delinquency; (iv) transparency, “[e]nsuring that the process to obtain assistance, and the terms of that assistance, are as clear and understandable as possible to homeowners, and that information about options and their utilization is available to the appropriate parties”; and (v) accountability, ensuring sufficient oversight of the process to obtain mortgage assistance.
FHFA Releases Update Regarding the GSEs' Single Security and Common Securitization Platform
On July 7, the FHFA released an update entitled An Update: An Implementation of the Single Security and the Common Securitization Platform (the Update) regarding Fannie Mae’s and Freddie Mac’s (collectively, the GSEs) joint venture – Common Securitization Solutions (CSS) – to develop and implement a Common Securitization Platform (CSP). As part of a multi-year initiative beginning as early as February 2012, the FHFA has been developing and reporting on the principles and functions for a new securitization platform that supports single-family residential mortgage-backed securitization activities guaranteed by the GSEs. FHFA’s recently issued Update outlines the CSS’s progress made to date, describes expected upcoming milestones, and summarizes the various phases of required testing for Release 1 and Release 2 of the CSP. Importantly, Release 1 will allow Freddie Mac to use the CSP and its Data Acceptance, Issuance Support, and Bond Administration modules to “perform activities related to its current single-class, fixed-rate securities—Participation Certifications (PCs) and Giant PCs—and certain activities related to the underlying mortgage loans (such as tracking unpaid principal balances).” Release 2 will allow both GSEs to use the CSP’s Data Acceptance, Issuance Support, Disclosure, and Bond Administration modules to “perform activities related to their current fixed-rate securities, both single- and multi-class; to issue Single Securities, including commingled resecuritizations; and to perform activities related to the underlying loans,” as well as to allow the GSEs to use the CSP “to issue and administer certain non-TBA mortgage securities, including Fannie Mae securities backed by adjustable rate mortgages.” According to the Update, the Single Security features of the CSP described in the FHFA’s May 2015 update have not been altered and are final. The Single Security features are fundamentally the same as those of the current Fannie Mae MBS and include: (i) payment delay of 55 days; (ii) certain pooling prefixes; (iii) mortgage coupon pooling requirements; (iv) minimum pool submission amounts; (v) general loan requirements such as first lien position, good title, and non-delinquent status; and (vi) seasoning requirements. As outlined in FHFA’s December 2015 publication of the 2016 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions, the GSEs are expected to implement Release 1 in 2016 and Release 2 in 2018.