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FHFA Sets Rules for Bulk Loan Sales

by devteam March 3rd, 2015 | Share

The Federal Housing Finance Agency (FHFA), conservator ofrnFannie Mae and Freddie Mac (the GSEs), released guidelines for their sales ofrnnon-performing mortgage loans.  FHFA earlierrnapproved sales as a mechanism to reduce the investment portfolios of the two enterprisesrnand to transfer some of the risk of their delinquent loans to the privaternsector.    FHFA said it believes that the sale ofrnseverely delinquent loans through non-performing loan (NPL) sales will both reducernGSE losses and improve borrower and neighborhood outcomes.  </p

Bulk sales of delinquent debt is done on a substantiallyrndiscounted basis and in the case of secured debt investors generally bid on thernbasis of the value of the underlying collateral. With rising home prices the attractivenessrnof such debt has increased as has demand for it and there has been concern thatrninvestors will fast-track foreclosures once they own the debt.   </p

In two pilot programs conducted by Freddie Mac, investors boughtrnseverely delinquent loans, generally those more than a year past due.  The first sale, in August 2014, transferred ownershiprnof loans with unpaid principal balances totaling $596 million and in thernsecond, conducted last month, loans with unpaid principal balances of $392rnmillion were sold.  FHFA said thernenhanced rules for future non-performing loan sales announced today are based,rnin part on a review of the two sales.</p

The requirements announced today are expected to encourage broadrnparticipation by potential investors and provide for future publication ofrnaggregate data about borrower outcomes.</p<ul type="disc"

  • Bidder qualifications: Bidders willrn be required to identify a servicing partner before qualifying to bid andrn this servicer must have a proven record of resolving delinquent loansrn through alternatives to foreclosure. </li
  • Modification requirements:  All pre-2009 borrowers, other than thosern with imminent foreclosure dates or who have vacated the property, must be evaluatedrn for a loan modification including through the Home Affordable Modificationrn Program (HAMP).  Post 2009 borrowersrn must be evaluated for a proprietary modification. The evaluation mustrn include a waterfall of resolution tactics including short sale andrn deed-in-lieu.  Foreclosure must bern the last option.</li
  • REO sale requirements: Servicers are encouraged to sellrn properties that have gone through foreclosure and entered Real Estatern Owned (REO) status to individuals who will occupy the property as theirrn primary residence or to non-profits.  </li</ul<ul type="disc"
  • Subsequent servicer requirements:  Subsequent servicers mustrn assume the responsibilities of the initial servicer.</li
  • Bidding transparency:  A process must be adoptedrn by each GSE to facilitate transparency and fairness in the bidding process.  </li
  • Reporting requirements:  Buyers and their servicers arern required to report loan resolution results and borrower outcomes to the GSEsrn to inform procedures for future NPL sale requirements. </li</ul

    FHFA Director Melvin L. Watt said that “FHFA expects that with thesernenhanced requirements, NPL sales by Freddie Mac and Fannie Mae will result inrnmore favorable outcomes for borrowers and local communities, while also<breducing losses to the Enterprises and, therefore, to taxpayers.  Under the requirements announced today,rnservicers must consider borrowers for a range of alternatives to foreclosure.”</p

    Bloomberg</isaid that Wall Street investment firms have been buying bad home loansrnas foreclosures diminish and the housing market recovers, pushing up prices ofrnthe debt.   The news agency specificallyrnnamed Lone Star Funds, One William Street Capital Management LP and EllingtonrnManagement Group as buyers.

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    • About the Author

    devteam

    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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