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New FHFA Director Takes Immediate Action To Halt G-Fee Increases, Announces Senior Staff Appointments
On January 6, former Congressman Mel Watt was sworn in as director of the FHFA. Two days later, on January 8, the FHFA halted previously announced plans to increase the base guarantee fee (g-fee) for all mortgages by 10 basis points, update the up-front g-fee grid, and eliminate the up-front 25 basis point adverse market fee except in certain states. Those changes were scheduled to take effect for (i) all loans exchanged for mortgage-backed securities with settlements starting April 1, 2014, and (ii) all loans sold for cash with commitments starting March 1, 2014. The move by FHFA Director Watt formalized a promise he made shortly after being confirmed for the position to delay the g-fee changes pending further review of their impact on mortgage credit availability and Fannie Mae and Freddie Mac’s risk exposure. The delay is opposed by, among others, several Republican members of Congress, who on January 8 sent Mr. Watt a letter urging the Director to implement the g-fee changes as originally announced.
On January 10, the FHFA announced several senior staff appointments. Bob Ryan, Senior Vice President of capital markets at Wells Fargo Home Mortgage and former adviser to HUD Secretary Shaun Donovan, will serve as Special Advisor – Industry. Eric Stein will leave the Center for Responsible Lending to serve as acting chief of staff before transitioning to Special Advisor – Consumer. Mr. Stein previously served as Deputy Assistant Secretary for Consumer Protection at the Treasury Department. Mario Ugoletti, who has served as a Special Advisor to the Acting Director of the FHFA since 2009, and has been appointed Special Advisor - Agency. Finally, Megan Moore will join the FHFA as Special Advisor – Intergovernmental. She most recently served in the Treasury Department’s Office of Legislative Affairs as Deputy Assistant Secretary for Housing, Small Business and TARP.
FHFA Recaps RMBS Litigation Following Latest Settlement
On January 2, the FHFA announced that it has obtained nearly $8 billion in connection with its RMBS litigation initiative. In 2011, the FHFA filed lawsuits against 18 financial institutions involving allegations of securities law violations and, in some instances, fraud in the sale of private label securities to Fannie Mae and Freddie Mac. The total recovered to date includes a recently announced $1.9 billion settlement, the FHFA’s sixth RMBS settlement thus far.
FHFA Proposes Decreased Loan Purchase Limits
On December 16, the FHFA requested public comment on a plan gradually to reduce the maximum size of loans purchased by Fannie Mae and Freddie Mac. The FHFA bases the plan on the uncertain future of Fannie Mae and Freddie Mac and “the desire for private capital to re-enter the market.” The FHFA states that it is considering starting the gradual decrease with approximately a four percent reduction in the maximum loan limit for one-unit properties—for example, from $417,000 to $400,000 in most locations, and from $625,000 to $600,000 for the highest-cost areas. The lower purchase limits would, at the earliest, apply to loans originated after October 1, 2014. The FHFA seeks specific comments on (i) the appropriate advance notice period for any final changes; (ii) the timing of any subsequent adjustments; (iii) whether any such subsequent adjustments should be announced in a multi-year schedule, and, if so, whether they should be based on specific dollar amount reductions or percent changes per year; (iv) whether reductions to the limit for areas that fall between the baseline limit and the high-cost limit should continue to be tied to median house prices or should be proportional to reductions in the baseline limit; and (v) whether loan limits should be set at even multiples of either $1,000 or some other dollar amount. Comments are due no later than March 20, 2014.
Fannie Mae, Freddie Mac Implement New G-Fee Schedule
On December 16, Fannie Mae issued Selling Guide Announcement SEL-2013-09 and Freddie Mac issued Bulletin 2013-26 to implement new guarantee fees (g-fees) for 2014, as recently mandated by the FHFA. The announcements provide updated up-front g-fee grids, which the FHFA claims are needed to better align pricing with the credit risk characteristics of the borrower.
Agencies Finalize Exemptions To Higher-Priced Mortgage Loan Appraisal Requirements
On December 12, the Federal Reserve Board, the CFPB, the FDIC, the FHFA, the NCUA, and the OCC, issued a final rule supplementing their January 2013 interagency appraisal rule. As described in detail in our Special Alert, the January 2013 rule amended Regulation Z to require creditors to obtain appraisals for a subset of loans called Higher-Priced Mortgage Loans (HPMLs) and to notify consumers who apply for these loans of their right to a copy of the appraisal. Those new requirements take effect January 18, 2014.
The supplemental final rule, which takes effect on the same date, exempts certain transactions from the HPML appraisal requirements. First, all loans secured in whole or in part by a manufactured home are fully exempt until July 18, 2015. After that date: (i) transactions secured by a new manufactured home and land are exempt only from the requirement that the appraisal include a physical review of the interior of the property; (ii) transactions secured by an existing manufactured home and land are not exempt from any HPML appraisal requirements; and (iii) transactions secured by a manufactured home but not land are exempt from all HPML appraisal requirements, provided the creditor provides the consumer with certain specified information about the home’s value. Second, the supplemental final rule exempts streamlined refinances—i.e. refinancing transactions where the holder of the successor credit risk also held the credit risk of the original credit obligation—so long as the consumer does not take any cash out and the new loan does have negative amortization, interest only, or balloon payments. Third, the supplemental final rule exempts “small dollar” transactions of $25,000 or less, indexed annually for inflation.
Senate Confirms FHFA Director; FHFA Announces Senior Staff, Organizational Change
On December 10, the U.S. Senate voted to confirm Representative Mel Watt (D-NC) to serve as Director of the FHFA. Once sworn in, Mr. Watt will replace Edward DeMarco, who has led the agency on an “acting” basis for more than four years. Mr. DeMarco has faced criticism from federal and state Democratic policymakers and housing groups, in part based on his decision to not direct Fannie Mae and Freddie Mac to engage in broad principal reduction programs.
On December 11, the FHFA announced that Jeffrey Spohn, FHFA’s Deputy Director of the Office of Conservatorship Operations, will retire in January, and that the FHFA will combine two offices managing conservatorship-related matters into a new Division of Conservatorship. That new division will be led by Wanda DeLeo, who currently serves as Deputy Director in the Office of Strategic Initiatives.
FHFA Increases Guarantee Fees
On December 9, the FHFA directed Fannie Mae and Freddie Mac to raise guarantee fees (g-fees). Under the directive, Fannie Mae and Freddie Mac will increase the base g-fee (or ongoing g-fee) for all mortgages by 10 basis points, and will update the up-front g-fee grid to better align pricing with the credit risk characteristics of the borrower. In addition, the up-front 25 basis point adverse market fee that has been assessed on all mortgages purchased by Freddie Mac and Fannie Mae since 2008 will be eliminated except in four states. As described in the FHFA’s State-Level Guarantee Fee Analysis, mortgages newly acquired by Fannie Mae and Freddie Mac that are originated in states that have expected carrying costs more than two standard deviations above the national average, will be charged an additional upfront guarantee fee of 25 basis points. The affected states include New York, New Jersey, Connecticut, and Florida. The FHFA originally proposed charging fees on mortgages originated in all states over one standard deviation, which would have covered the four listed, plus Illinois. The new g-fees will apply to (i) all loans exchanged for mortgage-backed securities with settlements starting April 1, 2014, and (ii) all loans sold for cash with commitments starting March 1, 2014.
SDNY Holds 2005 SEC Rule Change Did Not Alter Directors' Potential MBS Liability
On December 10, the U.S. District Court for the Southern District of New York held that the SEC’s promulgation of Rule 430B in 2005—which, among other things, broadened the category of disclosures that can be made in prospectus supplements rather than post-effective amendments to registration statements—did not alter the "liability date" for Section 11 liability for individuals who sign registration statements in the context of the shelf registration process. Fed.Hous. Fin. Agency v. HSBC N. Am. Holdings Inc., No. 1:11-cv-06201 (S.D.N.Y. Dec. 10, 2013). The ruling comes in the consolidated federal cases brought by the FHFA alleging numerous institutions misled Fannie Mae and Freddie Mac in connection with the packaging, marketing, sale and issuance of certain RMBS. The FHFA suits also named numerous individuals as a “control person[s]” under Section 15 of the Securities Act of 1933, or as directors or signing officers under Section 11 of the Securities Act. In response to a motion filed by more than 90 directors who signed the original registration statements but not the subsequent prospectus supplements, the court explained that Rule 430B deems newly disclosed information to be included in the registration statement, and Section 11 creates liability for signers whenever “any part of the registration statement, when such part became effective, contained an untrue statement of material fact or [omission].” The court interpreted the rule to mean that a prospectus supplement containing information representing a fundamental change in the information provided in the registration statement creates Section 11 liability for directors based on that new information. The court held that, as such, where there is a fundamental change in the information provided to the marketplace through the filing of a prospectus supplement, the new trigger dates for Section 11 liability will apply to those persons.
ACLU Seeks FHFA Documents On Eminent Domain Analysis
On December 5, ACLU-affiliated entities and borrower advocacy groups filed a lawsuit in the Northern District of California seeking to compel FHFA to produce “all [FHFA] records pertaining to the use of eminent domain to purchase mortgages.” Alliance of Californians for Community Empowerment v. Fed. Hous. Fin. Agency, No. 13-5618 (N.D. Cal. Dec. 5, 2013). Specifically, the plaintiffs seek to compel FHFA to respond to a FOIA request that demanded, among other things, (i) all communications and records of meetings between FHFA leadership and financial services industry trade associations and individual companies; (ii) all FHFA records regarding the City of Richmond’s proposal to seize certain mortgages; and (iii) all studies and analyses of the impact of eminent domain or principal reduction proposals relied upon by FHFA in support of materials it released in August 2013 outlining potential actions the agency could take in response to local efforts to employ eminent domain to seize mortgages. The complaint details the organizations’ position on eminent domain as a tool to implement principal reduction, which the organizations complain FHFA has improperly failed to pursue on its own. The request and complaint suggest that FHFA’s eminent domain position was unduly influenced by the financial services industry and “is advancing the interests of Wall Street firms at the expense of the nation’s homeowners.” This latest challenge of FHFA’s positions on eminent domain and principle reduction precede, potentially by days, an anticipated vote to confirm Representative Mel Watt (D-NC) to serve as FHFA Director.
FHFA Holds Conforming Loan Limits Steady, Announces Overhauled Mortgage Insurance Master Policy Requirements
On November 26, FHFA announced that 2014 maximum conforming loan limits will remain at $417,000, unchanged from 2013. On December 2, FHFA announced that Fannie Mae and Freddie Mac soon will provide guidance to lenders and servicers regarding specific effective dates for new requirements under the entities’ aligned, overhauled mortgage insurance master policies, which guidance will include changes related to loss mitigation, claims, assurance of coverage, and information sharing. FHFA, Fannie Mae, and Freddie Mac anticipate that the master policies will go into effect in 2014, pending review and approval by state insurance regulators.