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CFPB and FHFA Partner to Develop National Mortgage Database
The CFPB and the FHFA announced today an agreement to create a National Mortgage Database, the first comprehensive repository of mortgage loan information. The database primarily will be used to support the agencies’ policymaking and research efforts and help regulators better understand emerging mortgage and housing market trends. The database is intended to (i) monitor the health of mortgage markets and consumers, (ii) provide insight on consumer decision making, (iii) monitor new and emerging mortgage products, (iv) consolidate data on first and second lien mortgages for a given borrower, and (v) help policymakers understand consumer debt burden. The press release states that development of the dataset is currently underway and the agencies expect early versions of the full dataset to be complete in 2013. Once completed, the agencies plan to explore opportunities to share database information with other federal agencies, academics, and the public. The database will include information spanning the life of a mortgage loan from origination through servicing and include loan-level data about (i) the borrower’s financial and credit profile, (ii) the mortgage product and terms, (iii) the property purchased or refinanced, and (iv) the ongoing payment history of the loan. The agencies will build the database by matching a nationwide sampling of credit bureau files on borrowers’ mortgages and payment histories with informational files such as the HMDA database and property valuation models. The database will include historical data back to 1998 and will be updated on a monthly basis.
FHFA Plans to Improve Efforts to Recover Losses from Certain Defaulting Borrowers
On October 17, the FHFA Office of Inspector General (OIG) reported that the FHFA does not currently oversee the deficiency management programs of Fannie Mae and Freddie Mac (the Enterprises) and that some oversight is necessary. When borrowers default on mortgage loans held by Fannie Mae and Freddie Mac, the Enterprises absorb the losses. To date, the Enterprises have only recovered a small fraction of losses by pursuing defaulting borrowers that may have the ability to repay, such as strategic defaulters, including those defaulting on vacation homes or investment properties. The FHFA OIG recommended, and the FHFA agreed, that the FHFA should collect from the Enterprises data about their deficiencies, their efforts to target defaulting borrowers who have the ability to repay their loans, and other related data. The FHFA also agreed with the OIG that with such information in hand, the FHFA can proactively oversee the Enterprises’ deficiency management programs and provide supervisory guidance on managing deficiency collections.
FHFA Finalizes Five Year Plan
On October 9, the FHFA released a final five year strategic plan for its oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (the GSEs). The plan sets four strategic goals: (i) safe and sound housing GSEs, (ii) stability, liquidity, and access in housing finance, (iii) preservation and conservation of Fannie Mae and Freddie Mac assets, and (iv) preparing for the future of housing finance in the U.S. For each strategic goal, the plan establishes several “means and strategies.” The strategies include several steps the FHFA already is taking, including its ongoing efforts to enhance the use of short sales, promote sound underwriting, and set guarantee fees based on actual risk, as well as its recently released proposal to build a new infrastructure for the secondary market. While the FHFA sought and received comments on the draft version of its strategic plan, it did not identify any such comments as being incorporated in the final document, though it did note that comments may be considered again during the design and implementation of the programs intended to carry out the strategic plan.
FHFA Proposes New Secondary Market Infrastructure
On October 4, the FHFA released a white paper describing the framework for a new mortgage securitization platform and a model Pooling and Servicing Agreement. The proposed changes are part of a larger program to align and improve Fannie Mae’s and Freddie Mac’s (the Enterprises) business practices. Consistent with that program, the new platform would replace the proprietary structures used by the Enterprises with a more efficient common platform. Additionally, it would include certain enhancements and new capabilities. The proposed securitization platform would (i) facilitate broader sharing of credit risk, (ii) perform services related to the issuance and administration of mortgage-backed securities, (iii) be adaptable to policy changes and emerging technologies, and (iv) have an open architecture to drive interoperability. The model Pooling and Servicing Agreement would leverage the existing structures used by the Enterprises and, in doing so, would establish basic contractual requirements for pooling and selling and for the MBS/PC Trust. The FHFA seeks industry comment on the proposed framework, including responses to specific questions posed in the white paper. Comments must be submitted by December 3, 2012 and will be posted for public review.
Fannie Mae and Freddie Mac Align Certain Servicing Policies
On October 3, Fannie Mae and Freddie Mac (the Enterprises) issued announcements reflecting their recent effort to comply with an FHFA directive that the Enterprises work together to harmonize certain of their servicing policies and develop a consistent framework for assessing servicer performance. For example, Fannie Mae’s Servicing Guide Announcement SVC-2012-21 and Freddie Mac’s Bulletin 2012-20 include revisions to the Enterprises’ policies and practices regarding performance metrics for assessing servicers’ fulfillment of their duties. The Enterprises also updated servicing policies to harmonize (i) compensatory fee structures, (ii) servicer violations and remedies, and (iii) servicing terminations and transfer of servicing. The effective date of most changes discussed in the announcements is January 1, 2013. However, Fannie Mae announced miscellaneous contractual changes that are effective immediately, including its adoption of New York law as its choice of law provision, and its clarification of certain Servicing Guide sections related to indemnification and electronic records.
NY AG Files First RMBS Working Group Action, Expects More to Follow
On October 2, the Residential Mortgage-Backed Securities (RMBS) Working Group announced its first legal action. The civil complaint, filed against a major bank by New York Attorney General Eric Schneiderman on behalf of the people of that state, alleges that an underwriter acquired by the bank made fraudulent misrepresentations and omissions in the sale of RMBS to investors. The suit claims that losses resulting from the allegedly fraudulent sales total approximately $22.5 billion to date, but the complaint does not specify the damages sought. In announcing the suit, Attorney General Schneiderman, as well as Acting U.S. Associate Attorney General Tony West and other federal Working Group members, described the coordinated efforts that culminated in this filing. Specifically, Working Group members stressed the assistance provided by the SEC and the FHFA. Indeed, the allegations in the New York Attorney General’s complaint are similar to allegations previously made by the FHFA on behalf of Fannie Mae and Freddie Mac against numerous financial institutions. The allegations also parallel those made by private plaintiffs. On behalf of the RMBS Working Group, which was first announced by President Obama during his 2012 State of the Union address, Mr. Schneiderman has promised more civil, and potentially criminal, enforcement activity against other financial institutions.
FHFA IG Clears Freddie Mac's Use of Inverse Floating-Rate Bonds
On September 26, the FHFA Inspector General (IG) reported that neither Freddie Mac nor the FHFA purposefully limited refinancing opportunities to influence the yields of Freddie Mac inverse floating-rate bonds (inverse floaters). Inverse floaters are a by-product of other variable rate bonds carved out of Freddie Mac’s securitized mortgages to capitalize on increasing investor demand. Because the value of inverse floaters decreases when the underlying mortgages are refinanced, U.S. lawmakers and others argued that inverse floaters created a conflict of interest for Freddie Mac’s investment and refinancing policies because Freddie Mac could intentionally limit refinances to protect the value of its retained inverse floaters. The FHFA IG reviewed the practice and Freddie Mac’s portfolio and determined that (i) inverse floaters represent a small portion of Freddie Mac’s capital markets portfolio, (ii) inverse floaters pose no greater conflict than do any other mortgages held by Freddie Mac, and (iii) Freddie Mac employs an “information wall” to prevent the use of nonpublic information—including information about refinancing activity—from being used in investment decisions.
FHFA Proposes State-Level Guarantee Fee Pricing
On September 25, the FHFA published a notice and request for comment on its proposal to set risk-based guarantee fees by state. The proposal identifies five states—Connecticut, Florida, Illinois, New Jersey, and New York—that have substantially higher default-related costs than the national average. The proposed methodology for state-level guarantee fees considers three factors (i) the number of days it takes Fannie Mae or Freddie Mac to obtain marketable title, (ii) the average per-day carrying cost incurred by Fannie Mae or Freddie Mac, and (iii) the national average default rate on single-family mortgages. The FHFA is proposing to charge lenders an upfront fee of between fifteen and thirty basis points on each new mortgage originated in the five higher-cost states, beginning in 2013. The actual increase in the upfront fee would vary for each state, depending on default data in the state and the state’s deviation from the mean of the state-level estimates of expected total default-related carrying costs. The proposed approach is based on the expected costs of defaults on mortgages acquired by Fannie Mae and Freddie Mac in the future given current underwriting standards, rather than actual default losses realized over the past decade. The FHFA also states that its methodology for determining increased state-level fees could change in the future to consider other factors, including the impact of recently-enacted laws and ordinances or a wider range of state actions. The FHFA has asked for comments on the proposal by November 26, 2012.
FHFA Inspector General Publishes Two Reports
On September 18, the Inspector General (IG) for the FHFA published a report on the FHFA’s oversight of management of high-risk sellers and servicers by Fannie Mae and Freddie Mac (the Enterprises). The high-risk seller/servicer report presents a review of the Enterprises’ high risk counterparties and noted that more than 300 are on the Enterprises’ watch lists while more than forty have been blocked from doing business with the Enterprises. To better manage counterparty risk, the IG recommends that the FHFA promulgate standards for the Enterprises to develop contingency plans for handling a large seller/servicer’s failure, and that the FHFA finalize its proposed guidance for FHFA examiners to use in assessing the Enterprises’ contingency plans.
On the same day, the FHFA IG published a report regarding Fannie Mae’s purchase and transfer of certain mortgage servicing rights on approximately 384,000 loans for roughly $512 million. The IG determined that the amount paid was consistent with other such purchases made as part of a Fannie Mae program through which Fannie Mae transferred mortgage servicing rights from a regular servicer to a specialty servicer. While it determined that Fannie Mae did not overpay for the servicing rights in context, the IG recommended that the FHFA (i) consider requiring the Enterprises to seek approval for high costs initiatives, (ii) ensure additional scrutiny of pricing of future significant servicing transactions, (iii) reevaluate the Fannie Mae transfer program, and (iv) follow through with Fannie Mae’s implementation of prior FHFA directions regarding the purchase and transfer of mortgage servicing rights.
House Member Introduces Eminent Domain Bill
Recently, Representative John Campbell (R-CA) introduced a bill, H.R. 6397, that would prohibit Fannie Mae and Freddie Mac from buying mortgages originated in localities that employ eminent domain to rescue borrowers from their underwater mortgages by seizing the loans and selling them to private investors to be restructured. The FHFA currently is considering its options for responding potential action by localities absent legislative intervention.