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Federal, State Authorities Announce Largest RMBS Settlement To Date
On November 19, the DOJ, other federal authorities, and state authorities in California, Delaware, Illinois, and Massachusetts, announced a $13 billion settlement of federal and state RMBS civil claims, which were being pursued as part of the state-federal RMBS Working Group, part of the Obama Administration’s Financial Fraud Enforcement Task Force. The DOJ described the settlement as the largest it has ever entered with a single entity. Federal and state law enforcement authorities and financial regulators alleged that the bank and certain institutions it acquired mislead investors in connection with the packaging, marketing, sale and issuance of certain RMBS. They claimed the institutions’ employees knew that loans backing certain RMBS did not comply with underwriting guidelines and were not otherwise appropriate for securitization, yet allowed the loans to be securitized and sold without disclosing the alleged underwriting failures to investors.The agreement includes $9 billion in civil penalties and $4 billion in consumer relief. Of the civil penalty amount, $2 billion resolves DOJ’s claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), $1.4 billion resolves federal and state securities claims by the NCUA, $515.4 million resolves federal and state securities claims by the FDIC, $4 billion settles federal and state claims by the FHFA, while the remaining amount resolves claims brought by California ($298.9 million), Delaware ($19.7 million) Illinois ($100.0 million), Massachusetts ($34.4 million), and New York ($613.0 million). The bank also was required to acknowledge it made “serious misrepresentations.” The agreement does not prevent authorities from continuing to pursue any possible related criminal charges.
FHFA OIG Recommends Changes To Fannie Mae Short Sale Oversight
On November 20, the FHFA Office of Inspector General (OIG) issued a report critical of Fannie Mae’s oversight of its short sale process and the servicers who participate in that process. The OIG determined—based on a review of 41 short sale transactions handled by multiple Fannie Mae servicers—that five servicers were not always collecting all of the required documentation before making borrower eligibility determinations or seeking Fannie Mae approval. The report states also that servicers sometimes failed to conduct adequate reviews supporting borrower eligibility determinations. Further, the OIG found that borrowers with potentially significant financial resources sold multiple non-owner occupied properties through Fannie Mae’s streamlined documentation program, which allows servicers to approve short sales based only on low FICO scores and delinquency status. The OIG recommends that Fannie Mae strengthen its oversight of the short sale program by (i) enforcing the requirement that all borrowers outside the streamlined documentation program provide a borrower-certified borrower assistance form; (ii) establishing controls to identify and resolve inconsistencies between the borrower assistance form and supporting documentation; (iii) considering whether its servicer compensation structure should include the quality of borrower eligibility determinations for short sales and success in limiting losses; and (iv) enhancing controls over collection and use of electronic information from servicers on the financial condition of borrowers. The OIG also suggests that the FHFA should: (i) determine whether the streamlined documentation program should be available to borrowers seeking approval to short sell non-owner occupied properties; and (ii) provide examination coverage of Fannie Mae’s short sale activities with particular emphasis on identifying systemic deficiencies related to borrower submissions, Fannie Mae eligibility determinations, servicer compensation structure, and reliability of electronic information used in managing short sales.
Fannie Mae, Freddie Mac To Restrict Lender-Placed Insurance Practices
On November 5, the FHFA announced that it had directed Fannie Mae and Freddie Mac to implement new restrictions on lender-placed insurance practices. In March, the FHFA sought comments on certain potential lender-placed insurance restrictions, including new policies to (i) prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with placing coverage with or maintaining placement with particular insurance providers, and (ii) prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with an insurance provider ceding premiums to a reinsurer that is owned by, affiliated with or controlled by the sellers or servicer. Following that comment process and related efforts by the FHFA to obtain feedback on these issues, the FHFA now has directed Fannie Mae and Freddie Mac to provide aligned guidance to sellers and servicers to prohibit servicers from being reimbursed for expenses associated with captive reinsurance arrangements. The announcement does not provide any timeline for the new guidance, but states Fannie Mae and Freddie Mac will provide implementation schedules with the new rules.
Senate Blocks FHFA Director Nomination
On October 31, the U.S. Senate voted 56-42 on a procedural motion and blocked the advance of President Obama’s nomination of Rep. Mel Watt (D-NC) to serve as FHFA Director. The nomination needed 60 votes to clear the procedural hurdle and advance to a confirmation vote. Senate Majority Leader Reid (D-NV) voted “no” in a move to preserve his procedural options for bringing the nominee to the floor again at a later time.
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.
FHFA Updates Status of Common Securitization Platform
On October 7, the FHFA announced steps to formally establish the common securitization platform for mortgages sold to Fannie Mae and Freddie Mac. The FHFA stated that it has filed a Certificate of Formation with the Delaware Secretary of State to establish Common Securitization Solutions, LLC (CSS)—a limited liability company and equally-owned subsidiary of Fannie Mae and Freddie Mac. The company will be based in Bethesda, MD, and the search for its CEO and Chairman has been initiated.
FHFA Launches HARP Education Campaign
On September 23, the FHFA launched a nationwide campaign to educate borrowers about HARP. The FHFA explains that the campaign is designed to encourage homeowners who have been making their mortgage payments, but who owe more than their home is worth, to contact their current lender or any other mortgage lender offering HARP refinances to review their refinancing options. As part of this campaign, FHFA has launched a new website and is working with mortgage companies across the U.S. to help reach homeowners who may qualify.
FHFA Seeks to Clarify Relief from City of Chicago Vacant Property Ordinance
On September 20, the FHFA filed a motion requesting that the U.S. District Court for the Northern District of Illinois amend an order it issued after holding on August 23 that Fannie Mae and Freddie Mac are exempt from a 2011 City of Chicago ordinance that established new requirements for mortgagees and their agents regarding the maintenance of vacant property. The FHFA, as conservator of Fannie Mae and Freddie Mac, sued the city in December 2011 over the ordinance, which requires mortgagees to register vacant properties and pay a $500 registration fee per property. The FHFA asked the court “to specify the contents and persons” bound by its August 23 order. The motion was accompanied by a proposed order for declaratory and monetary relief, which would restate Fannie Mae’s and Freddie Mac’s immunity from the City’s ordinance and also would require the City to refund any payments that those the two enterprises, or any entities acting on their behalf, made pursuant to the ordinance.
Federal District Court Holds Fannie Mae, Freddie Mac Exempt From Chicago's Property Maintenance Ordinance
On August 23, the U.S. District Court for the Northern District of Illinois held that Fannie Mae and Freddie Mac are exempt from a 2011 ordinance that established new requirements for mortgagees and their agents regarding the maintenance of vacant property. FHFA v. City of Chicago, No. 11-8795, 2013 WL 4505413 (N.D. Ill. Aug. 23, 2013). The FHFA, as conservator of Fannie Mae and Freddie Mac, sued the city over the ordinance, which requires mortgagees to register vacant properties and pay a $500 registration fee per property. The ordinance also imposes maintenance and other obligations on mortgagees and their agents (including servicers, Fannie Mae and Freddie Mac), regardless of whether the properties are foreclosed upon, and mandates fines for non-compliance. The court granted summary judgment for the FHFA, holding that the statute that created the FHFA—the Housing and Economic Recovery Act of 2008 (HERA)—preempts the local ordinance. The court reasoned that although HERA does not expressly preempt local laws, Congress intended for the FHFA to be the only entity responsible for operating Fannie Mae’s and Freddie Mac’s business and could not have intended to allow thousands of municipalities to impose varying obligations on the FHFA. On those grounds, the court granted the FHFA’s motion for summary judgment. The court also held in the alternative “for purposes of completeness” that the registration fees imposed on Fannie and Freddie by the ordinance would constitute an impermissible tax on the FHFA in violation of the federal government’s immunity from taxation.
FHFA Plans Enhanced Oversight of Mortgage Servicing Transfers
On August 22, the FHFA Office of Inspector General (OIG) issued a report on its review of the FHFA’s oversight of Fannie Mae’s January 2013 representation and warranty settlement with a mortgage originator and the FHFA’s related approval of the sale of certain of the originator’s mortgage servicing rights (MSR) to specialty servicers. The OIG reviewed the process by which the FHFA assessed and approved the MSR transfer and concluded that the FHFA’s review of the MSR transfer did not reflect the “depth of analysis that likely would have been accorded had FHFA followed a process comparable to that used in its newly established process for reviewing mortgage repurchase . . . settlements.” As such, the OIG determined that the FHFA should establish a formal review process for “compensatory fee settlements and significant mortgage servicing rights transfers.” In a letter attached to the report, the FHFA concurred with the OIG’s recommendation, and committed to establish guidelines for compensatory fee settlements and significant MSR transfers by January 31, 2014.