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On January 23, Freddie Mac and Fannie Mae (the “Enterprises”) announced an updated Single-Family Social MBS and Corporate Debt Bonds Framework, and updates to mortgage-backed securities (“MBS”) disclosures. As part of the framework updates, the Enterprises will rename the Social Index to the “Mission Index” in February. Additionally, Fannie Mae will update the formulation of the index in February, and Freddie Mac will update the formulation of the index in May. The Mission Index offers MBS investors insights into the Enterprises’ mission-oriented lending initiatives, enabling investors to allocate capital towards those activities. The revised Mission Index will apply to pools issued by Fannie Mae starting in March and for Freddie Mac starting in June.
The updated frameworks define criteria beginning in June for the Enterprises’ mortgage collateral that may be pooled, issued and labeled “Social MBS.” That label is applied when the Mission Index score of the underlying pool exceeds a specified threshold. The Enterprises also announced they plan to provide impact reporting annually beginning in 2025, “which will help the market understand the associated impact of the loans underlying their investments.”
On January 1, Freddie Mac is launching a pilot program intended to improve the quality of performing loans for sellers. This pilot program, titled “Fee-Based Repurchase Alternative for Performing Loans,” is the fourth initiative from Freddie Mac’s Pilot Transparency programs, which included pilot programs on appraisal modernization, shared equity conversion, and asset and income modeler for direct deposits. This fee-based repurchase alternative pilot program for 2024 focuses on replacing Freddie Mac’s current repurchase policy for defective performing loans. “[L]enders will not be subject to repurchases on most performing loans and will instead be subject to a fee-based structure based on non-acceptable quality (NAQ) rates.” According to Freddie Mac, the fee-based structure will be more efficient and transparent and rewards lenders that deliver high-quality loans. Freddie Mac also notes that loans that are non-performing in 36 months or have life of loan defects could be repurchased. The pilot program is active; accordingly, the fee structure will begin rolling out in early 2024 to targeted lenders.
On December 4, Freddie Mac announced new, standardized mortgage documents aimed at of making down payment assistance (DPA) programs more accessible nationwide. According to Freddie Mac, the subordinate lien programs for DPA programs have been specific to particular housing finance agencies which created confusion. By standardizing these documents, Freddie Mac hopes to benefit lenders by making DPA programs more efficient.
To create the standardized documents, Freddie Mac partnered with Fannie Mae and state housing finance agencies. These documents will initially be available for 19 states, and eventually for all 50 states and the District of Columbia. These changes come in tandem with Freddie Mac’s new tool, DPA One®, to aggregate and showcase down payment assistance programs on a single platform.
On November 28, FHFA announced that it will raise the maximum conforming loan limits (CLL) for mortgages purchased in 2024 by Fannie Mae and Freddie Mac from $726,200 to $776,550 (the 2023 CLLs were covered by InfoBytes here) for most of the United States. In Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the maximum loan limit for one-unit properties will be 1,149,825. According to the FHFA, due to rising home values (up 5.56 percent since 2022), CLLs will be higher for all but five U.S. counties.
On November 2, the FHA released a mortgage letter (ML) updating the sales comparison approach for manufactured homes. The update to the FHA’s rule affects how real estate appraisers will now appraise manufactured homes using the sales comparison approach (SCA) grid. The SCA is the mix of attributes in a home that determine its value (e.g., floor area, features, location, number of bathrooms, lot size, etc.). A manufactured home is a home unit constructed entirely off-site and then shipped on-site. According to the FHA’s ML, this letter “updates the exception in the Sales Comparison Approach for Manufactured Housing (II.D.5.k) section of the Single-Family Housing Policy Handbook 4000.1” by aligning the “FHA[’s] insurance guidelines with the requirements from Fannie Mae and Freddie Mac programs.”
HUD Secretary Marcia L. Fudge spoke on this change, stating “[t]he critical step we're taking today ensures HUD is in alignment with our industry partners, and it will make more quality affordable housing available to people across the country.”
Fifth Circuit affirms dismissal of Fannie, Freddie shareholders’ claims related to FHFA removal restriction and funding
On October 12, the U.S. Court of Appeals for the Fifth Circuit affirmed dismissal of Fannie Mae and Freddie Mac shareholders’ claims that the FHFA’s unconstitutional removal restriction caused them harm and that the FHFA’s funding mechanism is inconsistent with the Appropriations Clause. After the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship, it entered into several preferred stock purchase agreements with the U.S. Treasury. As a result of these agreements, any value the companies generated would go to the Treasury and not to junior preferred and common stockholders such as plaintiffs.
The plaintiff shareholders sued in 2016, arguing that the “for cause” removal protection for the director of the FHFA was unconstitutional. The district court granted summary judgment in favor of FHFA, but a panel of the 5th Circuit reversed. Sitting en banc, the 5th Circuit then determined that the removal provision violated the separation of powers, and held that the proper remedy was to sever the removal restriction from the rest of the authorizing statute. On further appeal, the Supreme Court held that for-cause restriction on the President’s removal authority violates the separation of powers, but it refused to hold that the relevant preferred stock purchase agreement must be undone.
The Supreme Court remanded the case for lower courts to resolve whether the unconstitutional removal provision caused harm to plaintiffs as shareholders, and the 5th Circuit, again sitting en banc, remanded that question to the district court. Plaintiffs filed an amended complaint on remand, bringing claims under the Administrative Procedure Act (“APA”) and directly under the Constitution. The amended complaint also alleged, for the first time, that the FHFA’s financing structure violates the Appropriations Clause. Defendants moved to dismiss, and the district court granted the motion in its entirety and dismissed all claims with prejudice.
The 5th Circuit determined that the removal claims were within the scope of the remand order, contrary to the district court’s conclusion, but that the plaintiff’s APA claim was barred by an anti-injunction clause in the authorizing statute. Turning to the Constitutional claim, the 5th Circuit concluded that judicial review was not precluded and proceeded to the merits of the claim.
To show compensable harm from the unconstitutional removal provision, plaintiffs had to allege, among other things, a “nexus between the desire to remove and the challenged actions taken by the insulated actor.” More specifically, they had to allege a connection between the Trump Administration’s desire to remove the director of the FHFA and the Administration’s failure to have FHFA exit the conservatorships and return Fannie Mae and Freddie Mac to private control. The amended complaint, however, failed to plead facts demonstrating that the Trump Administration’s purported plan for re-privatization would have been completed if President Trump had been able to remove the existing FHFA director. Those allegations, the Fifth Circuit held, were insufficient.
The 5th Circuit agreed with the district court that the plaintiffs’ Appropriations Clause argument was outside the mandate of the earlier remand order. The appeals court reasoned that the remand order “[left] no opening for plaintiffs to bring a challenge under a completely different constitutional theory for the first time on remand,” nor was there an intervening change in the law such that the mandate rule would not apply.
On October 16, the Federal Housing Finance Agency (FHFA) announced it will revise how Fannie Mae and Freddie Mac (GSE) single-family mortgages are treated for borrowers who have entered Covid-19 forbearance under the GSEs’ representations and warranties framework. Under the revised policies, loans for which borrowers elected Covid-19 forbearance will be treated similarly to loans for which borrowers obtained forbearance due to a natural disaster. The GSEs’ current representations and warranties framework for natural disaster forbearance allows for consideration of the period during which a borrower is in forbearance as part of their demonstrated satisfactory payment history for the initial 36 months after the loan's origination. This framework will now be extended to loans with Covid-19 forbearance. FHFA Director Sandra L. Thompson said, "Servicers went to great lengths to implement forbearance quickly amid a national emergency, and the loans they service should not be subject to greater repurchase risk simply because a borrower was impacted by the pandemic."
The updates will be effective on October 31.
On August 10, FHFA published the Dodd-Frank Act Stress Tests Results – Severely Adverse Scenario containing the results of the ninth annual stress tests conducted by Fannie Mae and Freddie Mac (GSEs) as required by the Dodd-Frank Act. Last year, FHFA published orders for the GSEs to conduct a stress test with specific scenarios to determine whether companies have the capital necessary to absorb losses as a result of severely adverse economic conditions (covered by InfoBytes here). According to the report, the total comprehensive income loss is between $8.4 billion and $9.9 billion depending on how deferred tax assets are treated. Notably, compared to last year, the severely adverse scenario includes a larger increase in the unemployment rate due to the lower unemployment rate at the beginning of the planning horizon. FHFA also expanded the scope of entities considered within the primary counterparty default component of the worldwide market shock. This expansion encompasses mortgage insurers, unsecured overnight deposits, providers of multifamily credit enhancements, nonbank servicers, and credit risk transfer reinsurance counterparties.
On July 18, FHA announced a proposed rule for public comment that would revise requirements for investing lenders and mortgagees “to gain or maintain status as an FHA-approved lender or mortgagee.” The proposed rule would also “separately define Government-Sponsored Enterprises (GSEs) and the Federal Home Loan Banks (FHLB) from other governmental entities and align general FHA approval standards with current industry business practices.” The proposed changes are mainly aimed at accommodating more precise language and definitions concerning an investing lender or mortgagee's limited participation in FHA programs. According to FHA, these changes do not represent a significant departure from existing requirements for most lenders and mortgagees involved in originating, endorsing, or servicing FHA-insured loans. Through the proposed rule, HUD proposes to: (i) “separately define the GSEs and their approval requirements from other Federal, State, or municipal governmental agencies and Federal Reserve Banks”; (ii) include Freddie Mac, Fannie Mae, and the FHLBs in the GSE definition; (iii) add language to require investing lenders and mortgagees to comply with applicable audit and financial statement requirements; and (iv) “clarify that investing lenders and mortgagees must comply with FHA’s annual certification requirements.”
On May 24, the CFPB reported price dispersion trends in the mortgage industry, finding that borrowers could save at least $100 per month by choosing cheaper lenders. Price dispersion—the difference in interest rates charged by different lenders for the same loan product—is significant in the mortgage market, the Bureau said, following a review of 2021 HMDA data focusing on numbers for the 20 largest-volume lenders for each of the market segments. Examining price dispersion by loan type, including FHA and Department of Veterans Affairs loans, loans backed by Fannie Mae and Freddie Mac, and jumbo loans, the Bureau considered several potential factors contributing to price dispersion such as lender differences, competition, and increased demand. Additionally, the Bureau found that various options provided by lenders may account for different costs and choices made by consumers who may not select the cheapest option due to other factors that outweigh price differences. Data also suggested that competition in the mortgage market does not always translate into lower prices, the Bureau reported, noting that a recent study administered by the Bureau and the FHFA revealed that “most borrowers who recently took out a mortgage responded that they believe they would pay the same price regardless of which lender they choose” and that few borrowers consider more than two options. The data also found that lenders who choose to take on riskier loans may compensate for the risk by charging higher prices.