FHFA puts new rules on non-performing GSE mortgages

The new regulations require investors to consider modifying borrowers’ mortgages before foreclosing.

The Federal Housing Finance Agency (FHFA) has enhanced requirements for sales of non-performing loans (NPLs) by Freddie Mac and Fannie Mae (the Enterprises).  FHFA approved NPL sales by the government-sponsored enterprises (GSEs) to reduce the number of severely delinquent loans held in their inventories and to transfer risk to the private sector.

The new regulations require buyers of the delinquent loans to consider modifying borrowers’ mortgages before foreclosing.  The investors will need to resort to foreclosure as a last option, after attempts at a modification or short sale fail, according to the new FHFA rules.

"FHFA expects that with these enhanced requirements, NPL sales by Freddie Mac and Fannie Mae will result in more favorable outcomes for borrowers and local communities, while also reducing losses to the Enterprises and, therefore, to taxpayers," FHFA Director Melvin Watt, said.  "Under the requirements announced today, servicers must consider borrowers for a range of alternatives to foreclosure.”

Enterprise NPL sales are generally include loans that are severely delinquent, such as loans that are more than a year past due.  Under a pilot program, Freddie Mac sold severely delinquent loans through two transactions in the past six months - one in August 2014 covering $596 million of unpaid principal balance (UPB), and the other on February 5, 2015 covering $392 million of UPB. 

FHFA said its enhanced requirements for future NPL sales are based, in part, on a review of the initial sales as well as other considerations.
Future NPL sales by the GSEs must meet the enhanced requirements, which include the following: 
  • Bidder qualifications: Bidders will be required to identify their servicing partners at the time of qualification and must complete a servicing questionnaire to demonstrate a record of successful resolution of loans through alternatives to foreclosure;
  • Modification requirements: The new servicer will be required to evaluate all pre-2009 borrowers (other than those whose foreclosure sale date is imminent or whose property is vacant) for the U.S. Department of the Treasury’s Making Home Affordable programs, including the Home Affordable Modification Program (HAMP). All post-January 1, 2009 borrowers (other than those with an imminent foreclosure sale date or vacant property) must be evaluated for a proprietary modification.  Proprietary modifications must not include an upfront fee or require prepayment of any amount of mortgage debt, and must provide a benefit to the borrower with the potential for a sustainable modification;
  • Loss mitigation waterfall requirements: Servicers must apply a waterfall of resolution tactics that includes evaluating borrower eligibility for a loan modification (HAMP and/or proprietary modification), a short sale, and a deed-in-lieu of foreclosure.  Foreclosure must be the last option in the waterfall.  The waterfall may consider net present value to the investor;
  • REO sale requirements: Servicers are encouraged to sell properties that have gone through foreclosure and entered Real Estate Owned (REO) status to individuals who will occupy the property as their primary residence or to non-profits.  For the first 20 days after any NPL that becomes an REO property is marketed, the property may be sold only to buyers who intend to occupy the property as their primary residence or to non-profits;
  • Subsequent servicer requirements:  Subsequent servicers must assume the responsibilities of the initial servicer;
  • Bidding transparency:  To facilitate transparency of the NPL sales program and encourage robust participation by all interested participants, Fannie and Freddie will develop a process for announcing upcoming NPL sale offerings.  This will include an NPL webpage on the Enterprise’s website, email distribution to small, non-profit and minority- and women-owned business (MWOB) investors, and proactive outreach to potential bidders.  Additionally, each GSE will host training sessions for interested non-profit and MWOB investors to facilitate better understanding of the NPL sales process. 
  • Reporting requirements:  NPL buyers and servicers, including subsequent servicers, are required to report loan resolution results and borrower outcomes to the GSEs for four years after the NPL sale.  These reports will help inform whether to make future changes to NPL sales requirements and determine whether an NPL buyer and NPL servicer continue to be eligible for future sales based on pool level borrower outcomes, adjusted for subsequent market events.