OIG analyzed the Settlement Policyrnand divided its provisions into more than 50 elementsrnand then reviewed whetherrnFHFA and Fannie Mae applied each of the 50 elementsrnto the resolution of the representation and warranty dispute.rnSome of the main elements were:</p<ul class="unIndentedList"<liSettlement Value and Commercial Reasonableness. Analysis by Fannie Mae and calculations of anrnindependent consultant led Fannie Mae and FHFA to conclude that the value ofrnthe reps and warranty settlement exceeded the value absent a settlement andrnthat the settlement was commercially reasonable. </li</ul<ul class="unIndentedList"<liIndependent Third-Party Review. Forrnsettlements valued in excess of $500 million a knowledgeable third-party mustrnreview and attest that the proposed settlement is a commercially reasonablernresolution. Fannie Mae obtained such arnreview and the consultant attested that the settlement was commerciallyrnreasonable in light of Fannie Mae's claims.</li</ul<ul class="unIndentedList"<liA settlement must also satisfy "one orrnmore goals of conservatorship" andrnthe policy lists reasons that meet that standard including that the settlementrnwill reduce costs of pursuing claims though lengthier and more costlyrnprocesses; speed the timeline for restoring stability to company operations, orrnbring certainty to and restore confidence in marketplace norms andrnpractices. FHFA stated in announcing the settlement that it was "a major steprnforward in resolving issues from the past and providing greater certaintyrnin the marketplace, which remain criticalrnFHFA goals as conservator."</li</ul<ul class="unIndentedList"<liA settlement must also be "properly documented." OIG's review of the transaction records showed that the documents required by the Settlement Policy were includedrnin the records. </li</ul<ul class="unIndentedList"<liThe settlement must also be properly coordinated withinrnFHFA and its legal, policy, and supervision staff who can analyze and assessrnthe claims at issue. Supervision staffrnmust also ensure that the Office of Conservatorship Operations (OCO) are aware ofrnissues arising from its examinations that may be relative to the proposedrnsettlement. Legal officials wererninvolved from the beginning. The Officernof Housing and Regulatory Policy (OHRP), while not involved in the reps andrnwarranty settlement was involved in the transfer of mortgage servicingrnrights. Further FHFA staff were presentrnat several meetings at which the settlement was discussed. </li</ul<ul class="unIndentedList"<liUnder the Settlement Policy, OCO must-tornthe extent practicable and appropriate-ensure reasonable consistency with other GSE settlements with specific counterparties across similar types of claims.rnFHFA statedrnwhile comparisons are difficult across transactions Fannie Mae did present FHFArnwith information regarding other settlements from recent years. </li</ul

OIG concluded that FHFA adhered to itsrnown established policy in reviewing the representation and warranty settlementrnbetween Fannie Mae and Bank of America.  But,rngiven that they were not included in the policy, the resolution of compensatoryrnfees and the transfer of servicing rightsrndid not benefit from such anrnestablished process.</p

Fannie Mae hadrndemanded compensatory fees from Bank of America for deficiencies in foreclosurernmanagement, specifically for the bank’s failure to meet deadlines.  The Bank had disregarding the demands andrnalmost all compensatory fees assessed from 2010 through September 2012 remainedrnoutstanding until the date of the settlement – approximately $664 million.</p

Fannie Mae was able to bring Bank of America to the negotiating tablernbecause of the banks interest in completing a significant MSR transfer to specialty servicesrnand needed Fannie Mae’s approval.  Itrntherefore agreed to negotiate resolution of the compensatory fee claims.  </p

OIG found that thernprocess FHFA used to reviewrnthe compensatory fee resolution was not on par with the processrnit had established for representation and warranty settlements.  One deficiency was that FHFA had failed tornconsider a comparable and contemporaneous situation at Freddie Mac.  Fannie Mae’s approval of the MSRrnsale was not formally a part ofrnthe settlement agreements but occurred simultaneously and FHFA recognized that the negotiation of therncompensatory fee exposurernwas directly linkedrnto the MSR transfer and was structured to providerngreater leveragernin the negotiation and resultant recoveryrnof funds owed to Fannie Mae. </p

Both OIG and FHFArnhave longrnexpressed concern about GSE servicing transfers and in September 2012 OIGrnrecommended that FHFA more closely monitor transfers to high touchrnservicers.  FHFA said it intended tornensure that Fannie Mae was adequately managing the risk related to theserntransfers and would continue to follow up through the 2013 examination cycle.  Based on OIG’s and its own studies FHFA wasrnaware of the complexity and risk of large MSR transfers to specialty servicersrnand aware of the significance of its own review of these transfers.  </p

Although FHFA has revised and refinedrnits delegations of authority to the GSEs it continues to consider servicingrntransfer to be within the GSEs regular business activities and corporate discretion.  However, along with being actively involvedrnin most aspects of the Fannie Mae/Bank of America settlement FHFA’s OHRP andrnits Division of Enterprise Regulation reviewed and OHRP ultimately approved thernMSR transfer.</p

Nonetheless, OIGrnconcluded the review of the MSR transfer did not reflect the depth of analysis</bthat likely would have been accordedrnhad FHFA followed a processrncomparable to that used in its newly established process for reviewing mortgagernrepurchase, mortgage insurance, and PLMBS settlements.</p