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FHFA, City Of Chicago Resolve Dispute Over Vacant Property Ordinance
On April 3, the U.S. District Court for the Northern District of Illinois approved an order of dismissal and memorandum of understanding jointly entered by the FHFA and the City of Chicago to end more than two years of litigation over a city ordinance that requires mortgagees to register vacant properties and pay a $500 registration fee per property. The ordinance also imposes maintenance and other obligations—whether the property has been foreclosed upon or not—with fines for noncompliance. In 2011, the FHFA sued the city, objecting that the ordinance would have improperly covered the activities of Fannie Mae, Freddie Mac, and their agents. In August 2013, the court held that Fannie Mae and Freddie Mac are exempt from the ordinance, and the FHFA subsequently sought to clarify the scope of the court’s order and asked the court for declaratory and monetary relief. The parties now have agreed to a memorandum of understanding pursuant to which the city will not enforce the ordinance against Fannie Mae, Freddie Mac, or their agents for as long as the GSEs remain under federal conservatorship. The FHFA agreed that Fannie Mae and Freddie Mac will voluntarily register their vacant properties with the city, and the FHFA agreed not to try to recover fees and penalties already paid to the city under the ordinance.
House Republicans Urge FHFA Not To Direct GSEs To Start Contributing To Affordable Housing Funds Established By HERA
On April 2, House Financial Services Committee Chairman Jeb Hensarling (R-TX), joined by Congressmen Scott Garrett (R-NJ) and Ed Royce (R-CA), urged FHFA Director Mel Watt to continue the FHFA’s five-year-old policy of suspending contributions to the Affordable Housing Trust Fund and the Capital Magnet Fund. These two funds were established in the Housing and Economic Recovery Act (HERA) to direct a percentage of GSE profits into affordable housing using a mechanism that would be off-budget and thus not subject to the Congressional appropriations process. In January, more than 30 Democratic Senators pressed Mr. Watt to change course and lift the suspension. Given that the federal government owns $189 billion in outstanding senior preferred shares, the Republican House members believe that lifting the suspension would divert money from Fannie Mae and Freddie Mac that could be used to compensate taxpayers. They added that funding the affordable housing programs would violate the “letter and spirit of the Housing and Economic Recovery Act,” and would be premature given ongoing congressional deliberations over broader housing finance reform.
Fannie Mae, Freddie Mac Clarify Rural Property Appraisal Requirements
On April 1, Freddie Mac issued Bulletin 2014-05, and on March 25, Fannie Mae issued Lender Letter LL-2014-02, in response to directives from the FHFA to clarify certain requirements related to appraisals for properties located in rural areas. In the clarifying documents, Fannie Mae and Freddie Mac state that they do not require the use of third-party vendors such as appraisal management companies to order appraisals or to comply with requirements that the mortgage production function and the appraisal ordering and quality assurance functions remain separate. In addition, both Fannie Mae and Freddie Mac provide a small lender exception to the separation requirement. The guidance documents also state that a residential property in a market that contains properties or land uses that are non-residential in nature, is not necessarily ineligible for sale to Fannie Mae or Freddie Mac. Both entities assert that they will purchase a mortgage secured by a property that is unique or may not conform to its neighborhood, provided an appraiser is able to evaluate and report on how the characteristics of the market area and unique property features affect the value and the marketability of the subject property. The guidance documents also advise sellers that in areas with less real estate activity, such as rural market areas, appraisers may, with documented support, use comparable sales that are older than 12 months, or that are a considerable distance from the subject property or not similar to the subject property.
FHFA's Former Acting Director Announces Departure
On March 24, the FHFA announced that former Acting Director Ed Demarco will leave the agency at the end of April. Mr. Demarco has been assisting with the leadership transition since former Congressman Mel Watt was sworn in as FHFA Director in early January.
FHFA Resolves Additional RMBS Suits
Recently, the FHFA announced the resolution of several lawsuits it filed against private label securities issuers. In 2011, the FHFA sued 18 financial institutions alleging federal securities law violations, and in some cases common law fraud, with regard to the sale of private label residential mortgage backed securities to Fannie Mae and Freddie Mac. On March 26, one financial institution agreed to pay $9.33 billion—including cash payments and a purchase of securities from Fannie Mae and Freddie Mac—to resolve a case filed against the institution and cases filed against two other institutions it had acquired. On March 21, a separate institution agreed to pay $885 million to resolve the FHFA’s allegations. The FHFA has claims remaining in seven of the 18 suits it filed.
Federal Regulators Propose Framework for State Supervision of Appraisal Management Companies
On March 24, the Federal Reserve Board, the OCC, the FDIC, the CFPB, the FHFA, and the NCUA proposed a rule to implement the Dodd-Frank Act’s minimum requirements for registration and supervision of Appraisal Management Companies (AMCs). While current federal regulations mandate that appraisals conducted for federally related transactions must comply with the Uniform Standards of Professional Appraisal Practice (USPAP), this rule would represent the first affirmative federal obligations relating to the registration, supervision, and conduct of AMCs.
Generally, the proposed rule would establish a framework for the registration and supervision of AMCs by individual states that choose to participate, and for state reporting to the Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examination Council (FFIEC). Although state participation is optional, AMCs would be prohibited from providing appraisal management services for federally related transactions in states that do not establish such a program.
Comments on the proposal will be due 60 days following publication in the Federal Register.
Scope of Proposal
The proposal defines an AMC as any person that (i) provides appraisal management services to creditors or secondary mortgage market participants; (ii) provides such services in connection with valuing a consumer’s principal dwelling as security for a consumer credit transaction (including consumer credit transactions incorporated into securitizations); and (iii) within a given year, oversees an appraiser panel of more than 15 state-certified or state-licensed appraisers in a state or 25 or more state-certified or state-licensed appraisers in two or more States. “Appraisal management services” include, among other things, recruiting, selecting, and retaining appraisers and contracting with state-certified or –licensed appraisers to perform appraisal assignments. Notably, the rule would apply to appraisals for any consumer credit transaction secured by the consumer’s principal dwelling, whereas current federal regulations apply only to appraisals for transactions that involve an entity regulated by a federal financial regulatory agency and that require the services of an appraiser (federally related transactions).
The definition of AMC does not cover commercial real estate transactions or securitizations involving commercial real estate mortgages and would not apply to a department or division of an entity when such a department or division provides appraisal management services only to that entity. However, affiliate AMCs would be covered, even if they only provide services to their affiliated entity.
Minimum Requirements for State Supervision Programs
The rule would require participating states to implement, within 36 months after the final rule takes effect, a licensing program within a state agency that has authority to: (i) review and approve or deny an AMC’s application for initial registration; (ii) review and renew or refuse to renew an AMC’s registration periodically; (iii) examine the books and records of an AMC operating in the state and require the AMC to submit reports, information, and documents; (iv) verify that the appraisers on the AMC’s appraiser list, network, panel, or roster hold valid state certifications or licenses, as applicable; (v) conduct investigations of AMCs to assess potential violations of applicable appraisal-related laws, regulations, or orders; (vi) discipline, suspend, terminate, and refuse to renew the registration of an AMC that violates applicable appraisal-related laws, regulations, or orders; and (vii) report an AMC’s violation of applicable appraisal-related laws, regulations, or orders, as well as disciplinary and enforcement actions and other relevant information about an AMC’s operations, to the ASC.
Requirements for AMCs
The rule would require an AMC to register with, and be subject to supervision by, a state appraiser certifying and licensing agency in each state in which the AMC operates. As proposed, an AMC that is a subsidiary owned and controlled by a federally regulated insured depository institution or an insured credit union would be exempt from state registration requirements.
In addition, an all AMCs would be required to (i) use only state-certified or state-licensed appraisers for federally related transactions; (ii) establish processes and controls reasonably designed to ensure that the AMC engages appraisers who have the requisite education, expertise, and experience necessary to complete competently the assignment for the particular market and property type; (iii) establish processes and controls reasonably designed to ensure that the AMC conducts its appraisal management services in accordance with TILA requirements relating to appraisal independence; and (iv) require appraisers to perform appraisal assignments in accordance with USPAP.
FinCEN Finalizes AML Rules For Fannie Mae, Freddie Mac
On February 20, FinCEN finalized a rule that will require Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (the GSEs) to develop AML programs and to file SARs directly with FinCEN. Under the current system, the GSEs file fraud reports with the FHFA, which then files SARs with FinCEN when warranted under FinCEN's reporting standards. The new regulations are substantially similar to the version proposed in November 2011, and are intended to streamline the reporting process and provide more timely access to data about potential fraud. The AML provisions of the new regulations implement the BSA's four minimum requirements: (i) the development of internal policies, procedures, and controls; (ii) the designation of a compliance officer; (iii) an ongoing employee training program; and (iv) an independent audit function to test programs. The SAR regulation requires reporting of suspicious activity in accordance with standards and procedures contained in all of FinCEN’s SAR regulations. In addition, under the streamlined system, the GSEs and their directors, officers, and employees will qualify for the BSA’s "safe harbor" provisions, which are intended to encourage covered institutions to report suspicious activities without fear of liability. The final rule does not require the GSEs to comply with any other BSA reporting or recordkeeping regulations, such as currency transaction reporting. The rule takes effect 60 days after publication in the Federal Register and the GSEs will have 180 days from publication to comply.
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.
Senate Democrats Press FHFA On Housing Trust Fund
On January 24, Senators Warren (D-MA), Reed (D-RI), Boxer (D-CA), and 29 other Senate Democrats sent a letter to FHFA Director Mel Watt asking that he lift the suspension on funding for the National Housing Trust Fund (NHTF) and the Capital Magnet Fund (CMF), in “a manner fully consistent with all applicable laws, rules, and regulations.” The Senators assert that the number of homes that are affordable to renters with incomes at or below 30 percent of area median income has decreased by more than one million units since passage of the Housing and Economic Recovery Act in 2008, resulting in a national shortage of nearly five million units affordable and available to extremely low-income renters, and that funding the NHTF and CMF cannot wait for Congress to agree on broader housing finance reform.
Bipartisan Group Of House Members Ask FHFA To Allow Use Of Alternative Credit Scores
On January 9, Representatives Ed Royce (R-CA), Jim Himes (D-CT), Spencer Bachus (R-AL), and Carolyn Maloney (D-NY) petitioned FHFA Director Mel Watt to expeditiously direct Fannie Mae and Freddie Mac to revise their seller/servicer guidelines to permit the use of credit scores from alternative credit score providers, so long as the scores are “empirically derived and demonstrably and statistically sound.” The lawmakers argue that a move to permit the use of scores other than those offered by FICO would “remove an unfair barrier to entry in the mortgage market” and “encourage the development of more predictive credit scores.”