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FHFA Issues Final Rule Amending Regulations Governing Eligibility for FHLBank Membership
On January 12, the FHFA issued a final rule amending membership eligibility in the Federal Home Loan Bank (FHLBank) system. The final rule, which follows the FHFA’s September 2014 proposal to revise the requirements for financial institutions applying for and retaining membership in the FHLBank system, removes two provisions from the proposal “that would have required FHLBank members to maintain ongoing minimum levels of investment in specified residential mortgage assets as a condition of remaining eligible for membership.” In addition, the final rule defines “insurance company” to exclude captive insurers, rendering such entities ineligible for FHLBank membership. According to the FHFA, a captive insurer’s primary business is to underwrite insurance for its “parent company or for other affiliates, rather than for the public at large.” According to the FHFA, “REITs and other entities have been forming captives solely for the purpose of providing ineligible institutions access to Bank advances,” and the FHFA’s final rule is “intended to prevent further use of captives to circumvent the membership eligibility of the Bank Act.” The final rule allows current captive insurer members who joined prior to the 2014 proposal up to five years to terminate their membership, and captive insurers who joined after the issuance of the 2014 proposal have one year to terminate. The final rule becomes effective 30 days from publication in the Federal Register.
Second Circuit Upholds District Court Decision, Applies New York's Six-Year Limitations Period on Contractual Claims
On November 16, the Court of Appeals for the Second Circuit affirmed the Southern District of New York’s decision to dismiss a leading global bank’s complaint against a nonbank mortgage lender alleging breach of contractual obligations to repurchase mortgage loans that violated representations and warranties. Deutsche Bank Nat’l Trust Co. v. Quicken Loans Inc., No. 14-3373 (2nd Cir. Nov. 16, 2015). The bank, under its right as Trustee of the loans, alleged that the lender breached aspects of representations and warranties contained in a 2006 Purchase Agreement, including those related to (i) borrower income; (ii) debt-to-income ratios; (iii) loan-to-value and combined loan-to-value ratios; and (iv) owner occupancy. The bank’s complaint also alleged that it sent the lender a series of notification letters between August 2013 and October 2013 demanding cure or repurchase of the loans, which the lender allegedly failed to do without justification. The bank challenged the District Court’s decision by arguing that New York’s six-year statute of limitations on contractual claims did not apply because the terms of the representations and warranties contained an “Accrual Clause” placing future obligations on the lender. However, the Second Circuit upheld the District Court’s ruling, concluding that the bank’s Accrual Clause only constituted a procedural demand and did not delay the accrual of the cause of action. Specifically, the Second Circuit found that the representations and warranties guaranteed the characteristics and quality of the loans at the time the loans were sold in 2006. As such, the six-year statute of limitations “began to run on the date the [representations and warranties] became effective and were either true or false at that time.” The Second Circuit also found that the Housing and Economic Recovery Act (HERA), which in part delays accrual of claims brought by the Federal Housing Finance Agency (FHFA), did not apply. Because FHFA only filed the summons in state court, and the Trustee filed the federal complaint and prosecuted the action, the Second Circuit found the case was not “brought” by FHFA and thus HERA did not apply.
FHFA Releases Fannie and Freddie's New Eligibility Requirements for Seller/Servicers
On May 20, the FHFA announced that Fannie Mae and Freddie Mac released updates to their operational and financial eligibility requirements for single-family mortgage Seller/Servicers. Because of changes in the servicing industry, the FHFA directed Fannie and Freddie to update their Seller/Servicer standards to “help ensure the safe and sound operation of the Enterprises and provide greater transparency, clarity and consistency to industry participants and other stakeholders and reflect feedback received over the past several months.” Fannie Mae’s revised operational standards will take effect by September 1, 2015, and Servicers must implement the financial eligibility changes by December 31, 2015. Operational standards for Freddie Mac Servicers will take effect August 18, 2015; financial eligibility revisions must be in place by December 31, 2015.
FHFA Extends Fannie and Freddie's Participation in HAMP and HARP
On May 8, FHFA Director Mel Watt spoke at the 22nd Annual Economic Summit, focusing on the agency’s conservatorship activities with Fannie Mae and Freddie Mac (GSEs). Most significantly, Director Watt announced that the agency is extending the GSEs’ participation in HAMP and HARP until the end of 2016. Since their 2009 inception, the two programs have relieved many borrowers of high monthly payments. HARP, allowing borrowers who regularly make their mortgage payments to refinance their loans and take advantage of low income rates, and HAMP, providing significant payment reductions tied to borrowers’ income, have prevented a number of foreclosures. Since HARP and HAMP were never intended to be permanent programs, this will be FHFA’s final extension of the GSEs’ participation. Looking forward, the agency plans to “consider how best to build on the lessons of HAMP for 2017 and beyond,” exploring possible streamlined modifications and refinance solutions for borrowers.
FHFA: G-Fees to Remain at Current Levels
On April 17, FHFA released the results of its Fannie Mae and Freddie Mac Guarantee Fee Review. The FHFA’s review considered the public responses to its June 2014 request for input, and according to the agency’s fact sheet, sought to reach a balance of (i) ensuring the safety and soundness of Fannie Mae and Freddie Mac; and (ii) fostering a liquid national housing market. Because the analysis of the fees showed that “the current average level of guarantee fees appropriately reflects the current costs and risks associated with providing [Fannie and Freddie’s] credit guarantee,” the agency will make only minor adjustments to the fees and does not expect the changes to impact Fannie and Freddie’s loan volume. The fee adjustments will fall into two categories: (i) elimination of the 25 basis point upfront adverse market charge; and (ii) addition of small fee increases for certain loans with risk-layering attributes, such as loans with secondary financing or investment properties.
FHFA Announces Fannie and Freddie's Revised Requirements for Private Mortgage Insurances Companies
On April 17, the FHFA announced that Fannie and Freddie have revised the requirements for private mortgage insurance companies insuring mortgage loans that Fannie and Freddie either own or guarantee. By setting financial and operational standards for the mortgage insurers seeking approval with Fannie and Freddie, the new requirements are designed to reduce risk to the GSEs. The new requirements are effective immediately for new applicants and will become effective December 31, 2015 for existing insurers already approved by Fannie and Freddie.
FHFA OIG: Continued Enterprise Profitability Is Not Assured
On March 18, the FHFA Inspector General released a white paper detailing the challenges faced by the government-sponsored enterprises (GSEs) that could adversely affect their future profitability. According to the white paper, the GSEs’ return to profitability in 2012 was linked significantly to non-recurring sources of income such as the release of valuation allowances against deferred tax assets, settlements of disputed representation and warranty claims, and settlements of legal claims relating to mortgage-backed securities. Specifically, the OIG reported that non-recurring sources accounted for 60% and 45% of net income in 2013 and 2014 respectively. In addition, the white paper cites the GSEs’ requirement to decrease its retained portfolio annually by 15%, requirements to pay a quarterly dividend to Treasury, the possibility of lower guaranty fees, congressional inaction to adopt housing finance reform, and market conditions such as changes in interest rates and home prices as factors that could force the GSEs to draw on the Department of Treasury for a taxpayer-funded bailout.
FHFA Director Testifies on the Hill
On January 27, FHFA Director Mel Watt testified at a House Financial Services Committee hearing. In prepared remarks, Watt mentioned the strengthened balance sheet of the GSEs since being placed into conservatorship, recent policy announcements, and future priorities for the agency.
FHFA Director Set to Testify At First Committee Hearing
On January 27, FHFA Director Mel Watt is scheduled to testify before the House Committee on Financial Services. The hearing, scheduled to begin at 10am, will be the first for the Committee in the 114th Congress.
CFPB Unveils Know Before You Owe "Owning A Home" Initiative
On January 13, the CFPB published a report based on results from its recent survey of consumers who had recently taken out new mortgages. The survey, jointly conducted by the CFPB and the FHFA, found that (i) almost half of consumers who take out a mortgage fail to shop around prior to application; (ii) three out of four consumers only apply with one lender or broker; (iii) 70% of consumers report relying on their lender or broker to get information about mortgages; and (iv) consumers who are knowledgeable about the mortgage process are more likely to shop around for loans. Along with the survey results, and as part of the CFPB’s Know Before You Owe initiative, the Bureau unveiled an interactive online tool called “Owning a Home,” which is designed to inform consumers shopping for a mortgage. The tool takes the borrower from the start of the home-buying process — with a guide to loan options, terminology, interest rates and costs — to the closing table with a closing checklist.