The Federal Housing Finance Agency is setting up new requirements for sales of nonperforming loans by Freddie Mac and Fannie Mae to help insure the loans go into the hands of more experienced, empathetic and capable mortgage servicers.
Enterprise nonperforming loan sales will generally be those mortgages that are severely delinquent — typically more than one year past due — and will reduce the number of severely delinquent loans held in the enterprises’ inventories and transfer risk to the private sector.
"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," said FHFA Director Melvin Watt. "Under the requirements announced today, servicers must consider borrowers for a range of alternatives to foreclosure," Watt said.
The enhanced rules are based on two pilot sales of NPLs last year and this year, along with other considerations
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, and the other on February 5, 2015 covering $392 million of UPB.
Both enterprises were marred with an influx in delinquent inventory after the financial crisis. These new requirements are expected to encourage broad participation by potential investors.
At the end of January, the FHFA proposed new minimum financial requirements for nonbank mortgage sellers and services that do business with the enterprises as part of an effort to reduce risk to the GSEs. The proposal included that all seller and servicers are required to have a minimum net worth base of $2.5 million plus 25 basis points of the total unpaid principal balance for the loans each nonbank services.
The new requirements include:
- 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 program
- 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.
- 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.
- 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, each Enterprise will develop a process for announcing upcoming NPL sale offerings.
- Reporting requirements: NPL buyers and servicers, including subsequent servicers, are required to report loan resolution results and borrower outcomes to the Enterprises for four years after the NPL sale.
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