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On February 5, the FHFA announced updated LIBOR transition plans for Fannie Mae and Freddie Mac (GSEs) single-family and multi-family mortgage sellers and lenders, providing the next steps in the transition from LIBOR to the Secured Overnight Financing Rate (SOFR) for adjustable rate mortgage (ARM) instruments. The next steps include (i) a “[n]ew language require[ment] for single-family Uniform…ARM instruments closed on or after June 1, 2020”; (ii) a requirement that “[a]ll LIBOR-based single-family and multifamily ARMs…loan application dates [must be] on or before September 30, 2020 to be eligible for acquisition”; and (iii) that “[a]cquisitions of single-family and multifamily LIBOR ARMs will cease on or before December 31, 2020.” The announcement links to information directly from the two GSEs: Fannie Mae Multifamily Mortgage Business Lender Letter 20-02, and Fannie Mae Single-Family Sellers Lender Letter LL-2020-01; and Freddie Mac Selling Updates Bulletin 2020-1 and Freddie Mac Multifamily Update on LIBOR Transition. The FHFA LIBOR Transition page notes that the GSEs have already stopped buying ARMs based on LIBOR that mature after 2021 in preparation for the termination of the benchmark’s use.
On January 31, the FHFA proposed updated minimum financial requirements for Fannie Mae and Freddie Mac (GSEs) single-family mortgage sellers and servicers. The updates are designed to provide transparency and consistency of capital and liquidity requirements for sellers and servicers with different business models. A key improvement to the 2015 minimum financial requirements (covered by InfoBytes here), FHFA stated, is that the updated standards will establish financial requirements for servicing Ginnie Mae mortgages. FHFA further noted that the new minimum liquidity standards will only be applied to non-depository institutions—depository institutions will continue to rely on their existing regulatory standards to meet the GSEs’ capital and liquidity requirements. FHFA will accept comments on the proposal for 60 days, and anticipates finalizing the requirements in the second quarter of 2020, with an expected effective date six months after finalization.
According to sources, on January 17, CFPB Director Kathy Kraninger sent a letter to prominent members of Congress announcing plans to extend the qualified mortgage patch—which exempts loans eligible for purchase by Fannie Mae and Freddie Mac (GSEs) from the Qualified Mortgage (QM) Rule’s 43 percent debt-to-income (DTI) ratio—for a short period beyond its current January 2021 expiration. As previously covered by a Buckley Special Alert, the Bureau issued an Advance Notice of Proposed Rulemaking last July to solicit feedback on, among other things, whether the DTI limit should be altered and how Regulation Z and the Ability to Repay/QM Rule should be amended to minimize disruption from the so-called GSE patch expiration. Kraninger notes in her letter that the Bureau plans to propose an amendment to the QM Rule to replace DTI ratios as a factor in mortgage underwriting with an alternative measure of credit risk. One alternative, Kraninger says, could be to use pricing thresholds based on the difference between the loan’s annual percentage rate and the average prime offer rate for a similar loan. The Bureau is also considering adding a “seasoning” approach through a separate rulemaking process to give safe harbor to certain loans when the borrower has made timely payments for a certain period, Kraninger states. Sources report that the Bureau plans to issue a Notice of Proposed Rulemaking no later than May.
On December 16, the FHFA released a notice of proposed rulemaking (NPRM) to amend the stress testing requirements for Federal Home Loan Banks (FHL Banks), consistent with changes made by Section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act). Specifically, the NPRM will (i) increase the minimum threshold for regulated entities to conduct stress tests from $10 billion to $250 billion in total consolidated assets; (ii) remove the requirements for FHL Banks subject to stress testing, as none of the banks meet the minimum threshold (notably, under the proposal, the Director will maintain the ability to require any regulated entity with assets below the minimum threshold to conduct stress tests at his or her discretion); and (iii) reduce the number of stress test scenarios from three to two by removing the “adverse” scenario. According to the FHFA, while the “adverse” scenario provides value in limited circumstances, “the ‘baseline’ and ‘severely adverse’ scenarios largely cover the full range of expected and stressful conditions.” As such, the FHFA believes removing the “adverse” scenario will reduce the supervisory burden for FHL Banks. The FHFA further proposes that the Enterprises (Fannie Mae and Freddie Mac)—who remain subject to stress testing under the NPRM—be required to conduct stress tests on an annual basis, as Section 401 changed the required frequency from “annual” to “periodic,” but did not define the term “periodic” in the Act.
Comments on the NPRM are due January 13, 2020.
On November 26, the FHFA announced that it will raise the maximum conforming loan limits for mortgages purchased in 2020 by Fannie Mae and Freddie Mac from $484,350 to $510,400. In high-cost areas, such as Los Angeles, New York, San Francisco, and Washington, D.C., the maximum loan limit will be $765,600. For a county-specific list of the maximum loan limits in the U.S., click here.
On November 4, the FHFA issued a Request for Input (RFI) on Fannie Mae’s and Freddie Mac’s (the GSEs) pooling practices as they relate to the formation of the “To-Be-Announced”-eligible Uniform Mortgage-Backed Securities (UMBS). The RFI follows the June launch of the UMBS—a common security through which GSE mortgage-backed securities will be issued (previously covered by InfoBytes here)—and seeks input to assist FHFA in determining whether further action or alignment is required to ensure reasonably consistent security cash flows and continued fungibility of the GSEs’ UMBS so they “remain a source of stable, affordable liquidity for the U.S. housing finance system.” In addition, FHFA requests input on whether having more aligned pooling practices could facilitate the issuance of UMBS by market participants beyond the GSEs, and seeks comments on other policies and practices that might affect UMBS compatibility. Comments are due December 19.
On October 23, Fannie Mae and Freddie Mac (GSEs) published the updated and redesigned Uniform Residential Loan Application (URLA), which reflects revisions announced in August at the direction of the FHFA, including the removal of the language preference question. (Previous InfoBytes coverage here.) The updated static URLA form and supporting materials can be accessed on Fannie Mae’s URLA web page. The announcement also states that the GSEs are on track to publish their updated automated underwriting system specifications and supporting documents next month and anticipate announcing the updated implementation timeline and mandate prior to year-end. Although the GSEs retired the dynamic version, an interactive PDF version of the redesigned URLA will be released in early 2020.
On October 16, 19 Democratic Senators wrote to FHFA Director, Mark Calabria, requesting the agency to reconsider its decision to remove the language preference question and housing counseling agency information from the redesigned Uniform Residential Loan Application (URLA), which was originally set to take effect on February 1, 2020. As previously covered by InfoBytes, in August, Fannie Mae and Freddie Mac (GSEs) announced, at the direction of the FHFA, that mandatory use of the redesigned URLA will no longer begin on February 1, 2020. Additionally, the GSE’s noted that FHFA is requiring the removal of the language preference question. The question, along with the home ownership education and housing counseling question, will now be a part of a separate voluntary consumer information form. In response, the Senators argue that the decision to remove the language preference question is arbitrary and could leave “loan servicers without basic communication information about their borrowers” as a voluntary information form may not be used or may not travel with the loan documents. The Senators assert that the language information is “vital” to policymakers and the planned revisions to the URLA were “an important step toward increasing language access throughout the mortgage market.” The letter requests that Director Calabria respond to their concerns by November 18.
On September 18, the FHFA issued Advisory Bulletin AB 2019-04, which provides guidance to Fannie Mae and Freddie Mac (GSEs) on fraud reporting requirements pursuant to 12 C.F.R. Part 1233 (FHFA Regulation). The Bulletin states that the GSEs are required to notify designees of the Director of the FHFA through the secure methods established by the FHFA within one calendar day from when the GSE discovers fraud or possible fraud that may have a “significant impact” on the GSE. The Bulletin defines “significant impact” as an event that “may create substantial financial or operational risk for the Enterprise, whether from a single event/incident or because it is systemic.” Moreover, the GSEs are required to submit a monthly fraud status report to the FHFA containing instances where they have (i) filed a suspicious activity report (SAR) with the Treasury Department or the Financial Crimes Enforcement Network; or (ii) discovered that the Enterprise purchased or sold a fraudulent loan or financial instrument, or suspects a possible fraud related to the purchase or sale of any loan or financial instrument, and the Enterprise has not filed a SAR. Additionally the GSEs are required to submit quarterly reports summarizing information concerning the GSE fraud risk management environments. The Bulletin is effective January 1, 2020.
En banc 5th Circuit declares FHFA structure unconstitutional, allows net worth sweep claims to proceed
On September 6, the U.S. Court of Appeals for the 5th Circuit reaffirmed, in an en banc rehearing, that the Federal Housing Finance Agency (FHFA) structure violates constitutional separation of powers requirements and allowed “net worth sweep” claims brought by a group of Fannie Mae and Freddie Mac (government-sponsored entities or GSEs) shareholders to proceed. As previously covered by InfoBytes, GSE shareholders brought an action against the U.S. Department of Treasury and FHFA arguing that (i) the FHFA acted outside its statutory authority when it adopted a dividend agreement that requires the GSEs to pay quarterly dividends equal to their entire net worth to the Treasury Department (known as “net worth sweep”); and (ii) the structure of the FHFA is unconstitutional because it violates separation of powers principles. The district court dismissed the shareholder’s statutory claims and granted summary judgment in favor of the Treasury Department and the FHFA on the separation of powers claim. On appeal, the 5th Circuit agreed with the lower court on the first claim, concluding that the net worth sweep payments were acceptable under the FHFA’s statutory authority and that the FHFA was lawfully established by Congress through the Housing and Economic Recovery Act of 2008 (HERA), which places restraints on judicial review. However, the appellate court reversed the lower court’s decision on the separation of powers claim, concluding that Congress went too far in insulating the FHFA’s single director from removal by the president for anything other than cause, ruling that the agency’s structure violates Article II of the Constitution.
After an en banc rehearing, the appellate court issued two separate majority opinions. Both opinions concluded that (i) the GSE shareholders plausibly alleged that the net worth sweep exceed the powers of the FHFA when acting as a conservator under HERA; and (ii) the FHFA’s structure—which provides the director with “for cause” removal protection—violates the Constitution’s separation of powers requirements. However, the opinions differed on the appropriate remedy, with nine judges concluding that the remedy should be severance of the for-cause provision, not prospective relief invalidating the net worth sweep, stating that “the Shareholders’ ongoing injury, if indeed there is one, is remedied by a declaration that the “for cause” restriction is declared removed. We go no further.”
Various dissenting opinions were issued, including one signed by seven judges concluding that the FHFA acted within its statutory powers under HERA when it adopted the net worth sweep, stating “the FHFA’s ‘powers are many and mostly discretionary.’” In another dissenting opinion, four judges argued that the majority opinions wrongly concluded that the FHFA’s structure is unconstitutional, arguing that there are “only reasons for caution and skepticism, and none for action” in the constitutional claim. “Neither the Constitution’s text, nor the Supreme Court’s constructions thereof, nor the adversary process in this litigation has given us much ground on which to declare the FHFA’s design unconstitutional,” the judges argued.
Given the similarities of the FHFA’s single director structure with that of the CFPB, this case warrants close attention as it has the potential to create a vehicle for consideration by the Supreme Court of the constitutionality of single director agencies.
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