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FHFA updates GSE equitable housing finance plans
On April 5, FHFA announced updates to Fannie Mae and Freddie Mac’s (GSEs) equitable housing finance plans for 2023. (See plans here and here.) The updates include adjustments to plans first announced last year (covered by InfoBytes here), which faced pushback from several Republican senators who argued that the plans raised “significant legal concerns” and that “no law authorizes FHFA to use a GSE’s assets to pursue affirmative action in housing.” (Covered by InfoBytes here.) The senators also argued that the Biden administration was “conscripting the GSEs as instrumentalities of its progressive racial equity agenda to achieve outcomes it cannot achieve legislatively or even legally.”
According to FHA’s announcement, the updated plans provide the GSEs with a three-year roadmap to address barriers to sustainable housing opportunities. Updates include (i) taking actions to remove barriers faced by Latino renters and homeowners in Fannie Mae’s plan; (ii) an improved focus on ensuring existing borrowers are able to receive fair loss mitigation support and outcomes through monitoring and developing strategies to close gaps; (iii) providing financial capabilities coaching to build credit and savings; (iv) supporting locally-owned modular construction facilities in communities of color; and (v) increasing the reach of GSE special purpose credit programs to support homeownership attainment and housing sustainability in underserved communities.
FHFA proposes changes to GSE regulatory capital framework
On February 23, FHFA issued a notice of proposed rulemaking (NPRM) to amend the Enterprise Regulatory Capital Framework (ERCF) that governs Fannie Mae and Freddie Mac. (See also FHFA fact sheet here.) Changes include modifications to the capital requirements for commingled securities, the introduction of a 0.6 risk multiplier for calculating multifamily mortgage exposures backed by properties with certain government subsidies, the introduction of a standardized approach for calculating counterparty credit risk for derivatives and cleared transactions, and modifications for how representative credit scores for single-family loans are determined. Fannie and Freddie would also be required to “assign an original credit score of 680 to single-family mortgage exposure without a permissible credit score at origination” instead of 600. The NPRM also modifies “guarantee assets, mortgage servicing assets, time-based calls for [credit risk transfer] exposures, interest-only [mortgage-backed securities], the single-family countercyclical adjustment, the stability capital buffer, and the compliance date for the advanced approaches.” Comments on the NPRM are due 60 days after publication in the Federal Register.
FHFA outlines MSR guidance for managing counterparty credit risk
On January 12, FHFA released an advisory bulletin communicating supervisory expectations for Fannie Mae and Freddie Mac (the Enterprises) related to the valuation of mortgage servicing rights (MSRs) for managing counterparty credit risk. FHFA emphasized that Fannie and Freddie’s “risk management policies and procedures should be commensurate with an Enterprise’s risk appetite[] and based on an assessment of seller/servicer financial strength and MSR risk exposure levels.” FHFA relayed that while sellers and servicers assign values to their MSRs, the Enterprises should implement their own processes to evaluate the reasonableness of seller/servicer MSR values. FHFA explained that Fannie and Freddie are “exposed to counterparty credit risk when seller/servicers provide representations and warranties that mortgage loans conform with its selling guide requirements,” and reiterated that “[f]ailure to meet such obligations and commitments may cause the Enterprise to incur credit losses and operational costs.”
The advisory bulletin lays out risk management expectations to ensure MSR values are reasonable, objective, and transparent, and provides guidance covering several areas, including (i) objective evaluation of MSR values; (ii) MSR valuations for mortgage loans owned or guaranteed by Fannie and Freddie as well as stress testing; (iii) MSR valuations for mortgage loans not owned or guaranteed by Fannie or Freddie; (iv) market data input; (v) use of third-party providers; (vi) frequency of evaluations; and (vii) discount to MSR values when servicing rights are terminated. The advisory bulletin is applicable only to MSRs for single-family mortgage loans and is effective April 1.
FHFA issues model risk management guidance
On December 21, FHFA issued guidance to Freddie Mac, Fannie Mae, the Federal Home Loan Banks (FHLBanks), and the Office of Finance on its model risk management framework. According to the bulletin, the purpose of the guidance—formatted as Frequently Asked Questions—“is to provide supplemental guidelines that will address some of the gaps in [FHFA’s 2013 Model Risk Management guidance] prompted by changes in model-related technologies and questions generated from the expanded use of complex models by the FHLBanks.” “The supplemental guidance also addresses model documentation, the communication of model limitations, model performance tracking, on-top adjustments, challenger models, model consistency, and internal stress testing.”
Fannie, Freddie announce LIBOR transition plans
On December 22, GSEs Fannie Mae and Freddie Mac announced replacement indices based on the Secured Overnight Financing Rate (SOFR) for their legacy LIBOR indexed loans and securities (see here and here). The announcement follows the Federal Reserve Board’s final rule setting forth recommended replacement rates for financial contracts based on LIBOR (covered by InfoBytes here). For single-family mortgage loans and related mortgage-backed securities, the GSEs selected the relevant tenor of CME Term SOFR plus the applicable tenor spread adjustment, as published and provided by Refinitiv Limited (also known as “USD IBOR Cash Fallbacks” for “Consumer” products). The transition to the replacement indices will occur the day after June 30, 2023, which is the last date on which the Intercontinental Exchange, Inc. Benchmark Administration Limited will publish a representative rate for all remaining tenors of U.S. dollar LIBOR. The GSEs also published replacement indices for multifamily mortgage loans and related mortgage-backed securities, single family and multifamily collateralized mortgage obligations and credit risk transfer securities, and derivatives.
GSEs must seek FHFA preapproval for new products
On December 20, FHFA announced a final rule requiring Fannie Mae and Freddie Mac to provide advance notice of new activities and to obtain prior approval before launching new products. (See also fact sheet here.) Among other things, the final rule establishes that FHFA will determine which new activities merit public notice and comment and would be treated as new products subject to prior approval. Specifically, the final rule establishes that once a Notice of New Activity is deemed received, FHFA has 15 calendar days to determine if the new activity is a new product that merits public notice and comment. Additionally, the final rule establishes a public disclosure requirement for FHFA to publish its determinations on new activity and new product submissions. Among other things, if the agency “determines that a new activity is a new product, the final rule requires FHFA to publish a public notice soliciting comments on the new product for a 30-day period.” The final rule is effective 60 days after publication in the Federal Register.
FHFA publishes new statistics on home valuations
On October 24, FHFA published a new Uniform Appraisal Dataset (UAD) Aggregate Statistics Data File, along with dashboards that provide visualizations of the newly available data related to home valuations. According to the press release, the UAD data file and dashboards provide stakeholders and the public access to a broad set of data points and trends found in appraisal reports that may be grouped by neighborhood characteristics and geographic levels. The data was compiled from 47.3 million UAD appraisal records collected from 2013 through the second quarter of 2022 on single-family properties. “As home valuations are a vital component of the mortgage process, publishing transparent, aggregate data on appraisals provides useful information to the public while protecting borrowers’ personally identifiable information,” FHFA Director Sandra L. Thompson said. “Today’s announcement exemplifies our commitment to the development of a more efficient and equitable valuation system that ultimately reduces appraisal bias.”
FHFA eliminates upfront fees for some borrowers
On October 24, FHFA announced the elimination of upfront fees for certain first-time homebuyers, low-income borrowers, and underserved communities as part of the agency’s ongoing review of Fannie Mae and Freddie Mac’s (GSEs) pricing framework. Specifically, upfront fees are eliminated for (i) first-time homebuyers who are at or below 100 percent of area median income (AMI) in most of the U.S. and below 120 percent of AMI in high-cost areas; (ii) HomeReady and Home Possible loans under the GSEs’ affordable mortgage programs; (iii) HFA Advantage and HFA Preferred loans; and (iv) single-family loans supporting the Duty to Serve program. These changes “will result in savings for approximately 1 in 5 borrowers of the [GSEs’] recent mortgage acquisitions,” FHFA Director Sandra L. Thompson said in the announcement, noting that the agency is working with the GSEs and will announce an implementation date shortly. The pricing updates also include targeted increases to upfront fees for most cash-out refinance loans. Implementation of these fees will start February 1, 2023, in order to minimize market and pipeline disruption.
FHFA announces validation of FICO 10T and VantageScore 4.0 for GSE use
On October 24, FHFA announced the validation and approval of both the FICO 10T credit score model and the VantageScore 4.0 credit score model for use by Fannie Mae and Freddie Mac (GSEs). The agency also announced that the GSEs will require two credit reports from the national consumer reporting agencies, rather than three. According to the announcement, FHFA expects implementation of FICO 10T and VantageScore 4.0 to be a multiyear effort, but once in place, lenders will be required to deliver both FICO 10T and VantageScore 4.0 credit scores with each loan sold to the GSEs. FHFA noted that FICO 10T and VantageScore 4.0 are more accurate than the classic FICO model because they include payment history for factors like rent, utilities, and telecommunications. FHFA also released a Fact Sheet on the newly approved models, which “will improve accuracy, strengthen access to credit, and enhance safety and soundness.”
Freddie to consider bank account data in automated underwriting
On October 17, Freddie Mac announced that beginning November 6, borrowers’ bank account data will be included as part of its loan purchase eligibility assessments. This “industry-first capability” will be made available to lenders and brokers through Freddie’s automated Loan Product Advisor (LPA) underwriting system. “With the addition of positive monthly cash flow data, our underwriting system can help with more accurately predicting a borrower’s ability to pay their mortgage because it uses a comprehensive view of how personal finances are managed over time,” Freddie said in its announcement. “Our latest innovation levels the playing field and helps make homes more accessible to borrowers whose lenders might not have qualified them with traditional methods of underwriting. This should particularly help first-time homebuyers and underserved communities.”
Lenders and brokers must obtain borrowers’ permission in order to submit financial data showing 12 or more months of cash flow activity. Data may be obtained from checking, savings, and investment accounts, including those used for direct deposit of income and monthly bill payments, such as rent, utilities, and auto loans, Freddie said, stressing that “account data submitted can only positively affect the borrower’s credit risk assessment.” Lenders and brokers will also be able to obtain financial account data from designated third-party service providers through LPA’s asset and income modeler—the same automated process used to verify assets, income, employment, and on-time rent payments, Freddie explained. Additionally, LPA will advise lenders when a borrower may benefit from the submission of additional account data.
The announcement follows Freddie’s decision to start considering on-time rent payments as part of its loan purchase decisions to increase homeownership opportunities for first-time homebuyers. (Covered by InfoBytes here.)