InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Fannie Mae, Freddie Mac Announce Additional Storm Relief Measures
On November 9, Fannie Mae and Freddie Mac announced that effective immediately servicers can suspend for 90 days evictions and foreclosures involving borrowers affected by Hurricane Sandy in order to assess the borrowers’ situations. In addition, next week Fannie Mae and Freddie Mac will issue guidance to servicers to expand the options they can offer to homeowners impacted by the hurricane. Under the new Fannie Mae guidance, servicers will be authorized to (i) extend forbearance for up to 12 months, where appropriate, (ii) provide loan modifications, once the homeowner is able to resume monthly mortgage payments, (iii) waive any late payment charges, (iv) suspend credit reporting for any homeowner for whom relief is granted, and (v) delay the initiation of any foreclosure action to determine the condition of the property and the borrower’s employment and income status. Freddie Mac’s policy changes will authorize servicers to (i) automatically suspend for 90 days evictions and foreclosure sales for borrowers with homes secured by Freddie Mac owned-or guaranteed mortgages and located in eligible disaster areas, (ii) verbally grant 90-day forbearances to all borrowers in eligible disaster areas, including borrowers with mortgages modified under HAMP or who are currently in a HAMP or Standard Modification Trial Period Plan, and (iii) expedite the distribution of insurance proceeds on storm damage claims. Additionally, Freddie Mac will maintain pricing that was in place at the time of the storm for mortgages that are secured by homes in eligible disaster areas and delivered through Freddie Mac's bulk guarantor channel.
Fannie Mae and Freddie Mac Issue Disaster Assistance Reminders for Servicers, Announce Disaster Policy Changes for Sellers
On October 31, Fannie Mae issued a servicing notice to remind servicers that they may temporarily suspend or reduce mortgage payments for up to ninety days for borrowers whose income is affected by a disaster or for borrowers within federally declared disaster areas. The notice also lists the steps a servicer providing relief measures must take once it becomes aware that a property has incurred damage as a result of a disaster. On November 1, Fannie Mae issued Selling Guide Announcement SEL-2012-12, which establishes a permanent selling policy for mortgages impacted by a disaster. This policy replaces Fannie Mae’s traditional approach of issuing Lender Letters for each disaster. Under the new policy, for mortgage loans other than DU Refi Plus and Refi Plus, lenders must take prudent and reasonable actions to determine whether the condition of the property may have materially changed since the effective date of the appraisal report, and whether an additional inspection or appraisal is necessary. The Announcement identifies specific criteria lenders should use when determining if a mortgage can be delivered without additional action. Fannie Mae will not require a property secured by a DU Refi Plus or Refi Plus mortgage to undergo an additional inspection and/or new appraisal following a disaster, and will not require that a property damaged as a result of a disaster be repaired prior to delivery as long as the loan meets the property insurance requirements described in the Selling Guide.
On October 30, Freddie Mac announced that its full menu of relief policies for borrowers affected by disaster is being extended to homeowners whose homes were damaged or destroyed by Hurricane Sandy and are located in jurisdictions that the President has declared to be Major Disaster Areas and where he has made federal Individual Assistance programs available to affected individuals and households. Freddie Mac encouraged servicers to help affected borrowers with Freddie Mac loans by (i) suspending foreclosure and eviction proceedings for up to 12 months, (ii) waiving assessments of penalties or late fees against borrowers with disaster-damaged homes, and (iii) not reporting forbearance or delinquencies caused by the disaster to the nation's credit bureaus. On November 2, Freddie Mac issued Single-Family Seller/Servicer Guide Bulletin 2012-24 to revise selling requirements for properties damaged as a result of a disaster. The Bulletin explains that, on a temporary basis for mortgages secured by properties located in eligible Disaster Areas impacted by Hurricane Sandy, required property valuation and underwriting documentation must be dated no more than 180 days before the note date. For Relief Refinance Mortgages, sellers are not required to determine if an additional property inspection or a new appraisal is necessary after an initial property valuation has been relied upon, provided that the mortgage meets property insurance requirements.
Fannie Mae and Freddie Mac Announce Short Sale Agreements with Mortgage Insurers; Freddie Mac Announces Other Servicing Updates
On October 31, Fannie Mae announced that it reached agreements with nine major mortgage insurance companies that will allow servicers to complete short sales and deeds-in-lieu of foreclosure without first obtaining approval from the mortgage insurer. The new standard delegation agreement executed with each of the mortgage insurers replaces various individual delegation agreements and is intended to create a more consistent and efficient process for borrowers and servicers.
On the same day, Freddie Mac issued Single-Family Seller/Servicer Guide Bulletin 2012-23, which also announced new delegation agreements with its mortgage insurers that will streamline short sales and deeds-in-lieu of foreclosure. Freddie Mac revised other requirements for servicers’ loss mitigation activities and updated its mortgage insurance claim documentation policy to require delivery of documentation no later than sixty days following the foreclosure sale, short sale, or acceptance of deed-in-lieu of foreclosure. The Bulletin also (i) requires approval by Freddie Mac of foreclosures in certain circumstances, (ii) revises imminent default documentation requirements, (iii) authorizes use of ACH for expense reimbursements and incentive payments, (iv) clarifies the policy for reimbursement of interest, and (v) updates charge-off recommendation requirements.
DOJ Files First Civil Fraud Suit Alleging False Claims Act And FIRREA Violations In The Sale Of Loans To Fannie Mae And Freddie Mac
On October 24, the United States Attorney’s Office for the Southern District of New York (SDNY) filed a $1 billion civil mortgage fraud lawsuit against a mortgage lender and a major financial institution in connection with loans sold to the government-sponsored enterprises (GSEs), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Filed as a complaint-in-intervention in a pending qui tam, or whistleblower, lawsuit, the complaint alleges that the mortgage lender engaged in a scheme to defraud the GSEs in connection with the mortgage loans it sold to them, and that the financial institution that later acquired the lender was aware of and continued the misconduct. The suit seeks damages and penalties under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). This is the first civil suit brought by the Department of Justice concerning mortgages sold to the GSEs, and indicates that the government might commence other suits based on the sale of conventional mortgages to those entities.
The government’s allegations focus on a loan origination system initiated by the lender in 2006 that allegedly eliminated checkpoints on loan quality and led to fraud and other defects in the loans. The complaint alleges that the lender and the financial institution sold these loans to the GSEs but misrepresented that the loans complied with GSE requirements. The GSEs pooled the loans into mortgage backed securities and sold them to investors, subject to guarantees on principal and interest payments. As the allegedly defective loans defaulted, the GSEs suffered over $1 billion in losses through the payment of guarantees to investors.
These allegations set forth a theory of liability that the government had not previously articulated. Previous cases brought by the government primarily involved loans made by government program participants and alleged misrepresentations made directly to government agencies, whereas the complaint in this case is based on conventional loans and alleged misrepresentations to the GSEs. Moreover, unlike previous cases, defendants did not receive federal funds directly from the government, but rather only may have received such funds indirectly based on the government’s funding of the GSEs.
In addition, the complaint also represents another use by the government of FIRREA. Here, FIRREA is used to pursue the alleged profits made by defendants from the challenged loan origination system. See “Understanding FIRREA’s Reach: When Does Fraud ‘Affect’ a Financial Institution.” The case also marks yet another financial fraud qui tam action filed in New York. Both the FCA and FIRREA provide substantial rewards for whistleblowers and the government’s relatively quick decision to intervene, along with its fast response in other recent matters, may encourage other such suits in the SDNY. See “Whistle-Blower Bounties May Encourage Residential Mortgage-Backed Securities Fraud Reporting.”
In short, this action is another example of the government’s increasingly aggressive efforts to recoup losses stemming from the financial meltdown, as well as a reminder of the significance of the whistleblower provisions in both the FCA and FIRREA. Most importantly, it is a clear sign that government loan program participants are no longer the only targets for financial fraud recovery, and that the government may challenge the conduct of any lender who sold loans to the GSEs.
Fannie Mae and Freddie Mac Provide Additional Guidance on Quality Control Practices
On October 19, Fannie Mae and Freddie Mac (the GSEs) issued supplemental guidance regarding the new representation and warranty framework for mortgages sold or delivered to the GSEs on or after January 1, 2013. The GSEs originally announced the new framework on September 11, 2012. Fannie Mae Selling Guide Lender Letter LL-2012-07, Freddie Mac Bulletin 2012-22, and a related Freddie Mac Industry Letter identify new elements of and effective dates for: (i) quality control principles; (ii) quality control sample process; (iii) quality control review process; (iv) enforcement practices; and (v) ongoing communications with sellers and servicers. Additionally, the GSEs provided clarification regarding life of loan representations and warranties related to misstatements, misrepresentations, omissions, and data inaccuracies. Finally, Freddie Mac also revoked the automatic repurchase trigger it initially announced under the new framework.
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.
Fannie Mae Announces Numerous Selling Guide Updates
On October 2, Fannie Mae issued Selling Guide Announcement SEL-2012-10, which updates and clarifies certain Selling Guide policies and procedures. First, the Announcement explains that the Selling Guide has been updated to incorporate prior changes announced in SEL-2012-09 (Updates to Refi Plus and DU Refi Plus) and SEL 2012-03 (Changes to Pricing Terms). Second, effective immediately, lenders must use the higher of the outstanding unpaid principle balance or the modified credit limit when calculating the HCLTV ratio for permanently modified home equity lines of credit. Third, Fannie Mae has removed the limit on the weighted-average coupon of fixed rate mortgage loans in MBS pools that involve a guaranty fee buyup, also effective immediately. Fourth, Fannie Mae has (i) clarified clarify distinctions between inactive and deactivated lenders, (ii) revised document custodian and custodial depository requirements, and (iii) updated the Eligibility Matrix.