The Federal Housing Finance Agency (FHFA), conservator of Fannie Mae and Freddie Mac (the GSEs), released guidelines for their sales of non-performing mortgage loans. FHFA earlier approved sales as a mechanism to reduce the investment portfolios of the two enterprises and to transfer some of the risk of their delinquent loans to the private sector. FHFA said it believes that the sale of severely delinquent loans through non-performing loan (NPL) sales will both reduce GSE losses and improve borrower and neighborhood outcomes.
Bulk sales of delinquent debt is done on a substantially discounted basis and in the case of secured debt investors generally bid on the basis of the value of the underlying collateral. With rising home prices the attractiveness of such debt has increased as has demand for it and there has been concern that investors will fast-track foreclosures once they own the debt.
In two pilot programs conducted by Freddie Mac, investors bought severely delinquent loans, generally those more than a year past due. The first sale, in August 2014, transferred ownership of loans with unpaid principal balances totaling $596 million and in the second, conducted last month, loans with unpaid principal balances of $392 million were sold. FHFA said the enhanced rules for future non-performing loan sales announced today are based, in part on a review of the two sales.
The requirements announced today are expected to encourage broad participation by potential investors and provide for future publication of aggregate data about borrower outcomes.
- Bidder qualifications: Bidders will be required to identify a servicing partner before qualifying to bid and this servicer must have a proven record of resolving delinquent loans through alternatives to foreclosure.
- Modification requirements: All pre-2009 borrowers, other than those with imminent foreclosure dates or who have vacated the property, must be evaluated for a loan modification including through the Home Affordable Modification Program (HAMP). Post 2009 borrowers must be evaluated for a proprietary modification. The evaluation must include a waterfall of resolution tactics including short sale and deed-in-lieu. Foreclosure must be the last option.
- 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: A process must be adopted by each GSE to facilitate transparency and fairness in the bidding process.
- Reporting requirements: Buyers and their servicers are required to report loan resolution results and borrower outcomes to the GSEs to inform procedures for future NPL sale requirements.
FHFA Director Melvin L. Watt said that "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. Under the requirements announced today, servicers must consider borrowers for a range of alternatives to foreclosure."
Bloomberg said that Wall Street investment firms have been buying bad home loans as foreclosures diminish and the housing market recovers, pushing up prices of the debt. The news agency specifically named Lone Star Funds, One William Street Capital Management LP and Ellington Management Group as buyers.
