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FHFA Proposes Mortgage Insurer Eligibility Requirements
On July 10, the FHFA sought input on a proposal to establish new eligibility requirements for private mortgage insurers seeking to insure Fannie Mae and Freddie Mac (the Enterprises) mortgages. As described in an overview document, the FHFA proposes to revise business requirements to identify, measure, and manage exposure to counterparty risk. The FHFA also proposes new financial requirements and minimum quality control program requirements, which it states are intended to (i) facilitate an insurer’s monitoring of adherence to its underwriting and eligibility guidelines; (ii) ensure data accuracy; and (iii) prevent the insuring of fraudulent mortgages or mortgages with other defects. An insurer would be required to submit to each Enterprise a copy of its quality control program annually, with changes noted from the prior year’s version. The proposal also describes numerous potential remedies available to the Enterprises should an insurer fail to meet its requirements, ranging from more frequent dialogue or visits with an insurer to suspension or termination. All components of the requirements would become effective 180 days after the publication date of the finalized requirements. During the input period, and until the requirements are finalized, any insurer already approved to do business with the Enterprises that does not fully meet each Enterprise’s existing eligibility requirements would continue to operate in its current status and would be given a transition period of up to two years from the publication date to fully comply. Comments on the proposal are due by September 8, 2014.
Inspector General Report Urges FHFA To Consider Lender-Placed Insurance Suits
On June 25, the FHFA Office of Inspector General (OIG) published a report that urges the FHFA to consider whether to pursue servicers and insurers for alleged lender-placed insurance (LPI) losses. The OIG cited prior determinations by state insurance regulators that LPI rates in their respective jurisdictions allegedly were excessive and that those rates may have been driven up by profit-sharing arrangements under which servicers allegedly were paid to steer business to LPI providers. The OIG believes that Fannie Mae and Freddie Mac “have suffered considerable financial harm in the LPI market.” The OIG explained that using a methodology similar to that utilized by a state insurance regulator, it estimates that for 2012 alone the combined financial harm due to “excessively priced LPI” amounted to $158 million. The OIG acknowledged that its assessments did not consider compensation already received by Fannie Mae or Freddie Mac from repurchase requests. The report also notes that the FHFA has yet to complete an assessment regarding the merits of potential litigation to recover alleged financial damages associated with the LPI market, but recommends that the FHFA do so and take appropriate action in response. In its response to the report, the FHFA concurred and pledged to complete the review in the next 12 months. The FHFA also pointed out that its litigation assessment would differ from the review conducted by the OIG and would consider potential legal arguments and litigation risks, economic assessments, and relevant public policies.
Freddie Mac Updates MERS Requirements, Fraud Reporting, Other Selling And Servicing Policies
On June 19, Freddie Mac issued Bulletin 2014-12, which updates and revises numerous selling and servicing requirements. According to the Bulletin, Freddie Mac has determined that because sellers/servicers will have difficulty complying with the CFPB’s borrower notification requirements for ARMs with lookback periods less than 45 days, as of January 1, 2015, Freddie Mac will no longer purchase those loans. Freddie Mac also announced that, effective October 15, 2014, mortgages originated in Montana, Oregon, and Washington where MERS is not the original mortgagee of record, but is a subsequent assignee, are not eligible for sale to Freddie Mac. The Bulletin updates and clarifies several other MERS-related requirements. In addition, the Bulletin announces revisions to fraud reporting requirements to require a seller/servicer to report fraud and suspected fraud to Freddie Mac when the seller/servicer has a reasonable belief that certain actions occurred during origination or servicing of a mortgage, and to extend the number of days within which a seller/servicer must report fraud and suspected fraud to Freddie Mac from 30 to 60 days. Finally, the Bulletin provides numerous additional updates related to (i) certain servicing-related forms; (ii) relief refinance mortgages; (iii) monthly debt-to-income ratio requirements; (iv) requirements for verification of large deposits; (v) area median income estimates; and (vi) several other selling issues.
Fannie Mae, Freddie Mac Announce Targeted Modification Program
Recently, Fannie Mae (Servicing Guide Announcement SVC-2014-12) and Freddie Mac (Bulletin 2014-11) introduced a temporary modification option targeted to borrowers located in Detroit, Michigan as part of the FHFA-directed Neighborhood Stabilization Initiative. The announcements provide the borrower, property, and mortgage eligibility requirements, borrower documentation requirements, and other program details. The announcements also establish requirements for servicers to process the new modification options, which servicers must implement for all evaluations conducted on or after September 1, 2014.
FHFA Requests Comments On Guarantee Fees
On June 5, the FHFA issued a request for input regarding its proposed increases to guarantee fees (g-fees) that Fannie Mae and Freddie Mac charge lenders. Earlier this year, FHFA Director Mel Watt halted g-fee changes announced by the agency under Mr. Watt’s predecessor. Those changes would have (i) raised the base g-fee for all mortgages by 10 basis points; (ii) adjusted up-front fees charged to borrowers in different risk categories; and (iii) suspended the up-front 25 basis point adverse market fee in all but four states. The FHFA now poses more than a dozen questions for commenters to consider and respond to as the FHFA assesses future policies regarding g-fees. Comments are due by August 4, 2014.
Massachusetts AG Sues FHFA Over Foreclosure Policies
On June 2, Massachusetts Attorney General (AG) Martha Coakley filed a lawsuit against the FHFA, Fannie Mae, and Freddie Mac for allegedly violating the state’s 2012 foreclosure prevention law, which, among other things, prohibits creditors from blocking home sales to non-profits that intend to resell the property back to the former homeowner. The AG claims that the FHFA has refused to require Fannie Mae and Freddie Mac to comply with the law, and as a result the companies’ “arm's length transaction” policies, under which the parties proposing to purchase a property must attest that there are no agreements that the borrower will remain in the property as a tenant or later obtain title or ownership, restrict the sale of properties in violation of the law. In addition to the alleged violation of the foreclosure prevention law, the AG claims that by illegally applying the arm’s length transaction policies, the companies engaged in unfair or deceptive acts or practices. The AG seeks an order enjoining the companies from applying policies in violation of the foreclosure law, and penalties of up to $5,000 for each unfair or deceptive act or practice. The AG recently notified the FHFA of the potential suit in a letter that also renewed the AG’s calls for the FHFA to allow Fannie Mae and Freddie Mac to include principal reductions as part of their loan modification alternatives.
Freddie Mac Announces Numerous Servicing Policy Updates
On June 3, Freddie Mac announced revisions to numerous servicing policies, including policies regarding, among other things, short sales and deeds-in-lieu of foreclosure (DILs), the CFPB’s mortgage servicing rules, and unemployment forbearance. Bulletin 2014-10 advises servicers that for new short sale and DIL evaluations conducted on and after August 1, 2014 (or sooner if a servicer chooses), Freddie Mac will permit a servicemember to qualify for a short sale or DIL provided the mortgaged property is or was previously the borrower’s primary residence. When such a short sale or DIL is approved for a servicemember as provided above, the servicemember will receive the existing benefits afforded to a service member with PCS orders. In addition, for any borrower seeking a short sale or DIL, Freddie Mac is establishing a new lookback period that requires the servicer to review the borrower’s credit report to determine that the borrower did not obtain a new mortgage in the six months preceding the delinquency or in the six months preceding the evaluation of the borrower for a short sale or DIL. In addition, Freddie Mac (i) is now requiring servicers to investigate any inquiries by mortgage creditors that appear on the borrower’s credit report to determine if the borrower obtained a mortgage in the lookback period; and (ii) soon will require the servicer to rely solely upon the results of the cash reserves and promissory note payment capacity formulae to determine when to request a contribution from a borrower who is 31 days or more delinquent. The Bulletin also includes revisions to the following requirements introduced in response to the CFPB’s mortgage servicing rules: (i) trial period payment adjustments after the borrower exercises the right to appeal; (ii) delay in referral to foreclosure or proceeding with the next legal action; (iii) foreclosure sale date timing; and (iv) borrower solicitation letters. Finally, among several other policy revisions, the announcement details unemployment forbearance policy changes similar to those announced by Fannie Mae on June 4, 2014.
FHFA Director Outlines Strategic Plan
On May 13, FHFA Director Mel Watt presented a new strategic plan for the FHFA under his direction, which will focus on fulfilling the FHFA’s obligations under current law, and will shift away from efforts to position the agency—and Fannie Mae and Freddie Mac—for a potential future role in a reformed secondary market. Mr. Watt discussed the representation and warranty framework changes announced by Fannie Mae and Freddie Mac (see Byte below), and also announced that (i) for loans with DTI above 43%, the FHFA will continue to permit the use of compensating factors in each company’s underwriting standards; (ii) the FHFA will not alter loan limits, as proposed under prior leadership; (iii) the FHFA will not expand HARP but will “retarget” the program to capture already qualified borrowers; and (iv) the FHFA will launch a new modification pilot program. Mr. Watt’s remarks did not cover principal reduction or servicing rights transfers, but during a question and answer session he indicated both issues are on the FHFA’s agenda for further consideration. Further, Mr. Watt explained that under his leadership the FHFA will not seek to affirmatively reduce Fannie Mae’s and Freddie Mac’s footprint, though the FHFA will continue to work to increase the role of private capital, and soon will issue a request for comment on potential guarantee fee changes. The FHFA also will focus on private mortgage insurance counterparties, including by strengthening master policies and eligibility standards for private mortgage insurers. Finally, the FHFA will continue to build a common single-family securitization platform and transition Fannie Mae and Freddie Mac to a single common security, but the FHFA is taking steps to “de-risk” the securitization platform project, including by emphasizing that the agency’s top objective for the common platform is to ensure that it works for the benefit of Fannie Mae and Freddie Mac and their current securitization operations.
Fannie Mae, Freddie Mac Change Representations and Warranties Framework
On May 12, Fannie Mae and Freddie Mac announced numerous changes to the companies’ representations and warranties framework to expand repurchase relief for lenders. As detailed in Fannie Mae Selling Guide Announcement SEL-2014-05 and Freddie Mac Bulletin 2014-08, effective for whole loans purchase on and after July 1, 2014 and for loans delivered into MBS with pool issue dates on and after July 1, 2014, the companies will provide two separate paths for sellers to obtain relief from representations and warranties: (i) based on the borrower’s acceptable payment history; or (ii) based on a satisfactory conclusion of a quality control loan file review. Relief based on an acceptable payment history will be triggered upon the borrower’s 36th monthly payment, as opposed to the current 60th payment. The announcements also detail payment history relief triggers for each company’s refinance loan products. Relief based on a quality control review will be triggered when the company (i) completes the review of the loan file, which includes a review of the credit underwriting and eligibility of the borrower, the property (including its value), and the project in which the property is located, if applicable, and determines that the mortgage is acceptable; (ii) completes the review and determines the mortgage is not acceptable because of a specific, curable, selling deficiency and the lender cures such deficiency; or (iii) completes the quality control loan file review and determines the mortgage is not acceptable but may be eligible for a repurchase alternative which expires or terminates by its terms. In addition, the companies will no longer automatically require loan repurchase when notified that the primary mortgage insurance has been rescinded. Both announcements provide a chart comparing the new relief triggers to those announced in September 2012, and Fannie Mae and Freddie Mac will soon begin providing lenders with reports listing mortgage loans that met the eligibility requirements for relief. Finally, for certain mortgage loans acquired on and after July 1, 2014, the companies will allow lenders to avoid repurchase for termination of primary mortgage insurance by paying the full mortgage insurance claim amount that would have been payable under the original mortgage insurance policy if the mortgage loan liquidates.
Freddie Mac Updates Foreclosure, Expense Reimbursement Requirements
On May 15, Freddie Mac issued Bulletin 2014-09, which updates foreclosure requirements to (i) permit servicers to begin utilizing the New York Foreclosure Inquest Program as an alternative foreclosure process to accelerate foreclosure actions in New York; (ii) provide servicers with greater flexibility on when to refer a mortgage secured by a primary residence to foreclosure; and (iii) revise foreclosure sale bidding requirements in states with the right of redemption. In addition, the announcement updates expense reimbursement requirements by (i) adding six new income codes for submitting expense reimbursement claims in the Freddie Mac Reimbursement System; and (ii) allowing permitted vendors access to the Reimbursement System for the purpose of submitting claims for servicer reimbursement using the expense and income codes listed in Guide Exhibit 74, Expense and Income Codes for Expense Reimbursement Claims. The announcement also includes several miscellaneous servicing policy changes including (i) an updated submission requirement for multipurpose loan transmittals; (ii) an extended submission time frame for subsequent transfers of servicing requests; (iii) new contact information for reporting a proposed or confirmed reorganization plan that includes a bankruptcy cramdown; and (iv) adding the service loans application to the list of tools and applications that are available to assist servicers in the monitoring of loans.