For the past several years, government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have been considering divesting themselves of nonperforming mortgages that present considerable risk to their bottom lines by selling those loans to private investors who in turn take over the mortgage servicing rights.
Now, as Fannie and Freddie gear up to auction off their portfolios of nonperforming loans (NPLs), the Federal Housing Finance Agency (FHFA), overseer of the GSEs, has issued new rules requiring investors that purchase the loans to try harder to reach solutions with borrowers that allow them to keep their homes and avoid foreclosure – whether that means extending loan terms, writing-down principal or pursuing a short sale.
Under the new rules, when an investor does foreclose, for the first 20 days it can consider selling the property only to nonprofit groups or to people who intend to live in the house, rather than to other investors.
The new rules are partly in response to housing nonprofits that have complained in recent years that some investors are treating delinquent homeowners too harshly after acquiring their mortgages. Some investor groups seek to fast track the foreclosure process so that they can quickly acquire the assets and convert them into rental units.
The introduction of the rules comes as Fannie and Freddie are preparing to auction off their portfolios of delinquent or nonperforming mortgages. By divesting themselves of these severely delinquent loans, which are often more than a year past due, the government-backed companies transfer the risk away from taxpayers to the private sector.Â
‘[The] 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,’ says Mel Watt, director of the FHFA, in a release. ‘Under the requirements announced today, servicers must consider borrowers for a range of alternatives to foreclosure.’
Freddie Mac has already sold severely delinquent loans through two ‘trial’ transactions – one in August 2014 covering $596 million of unpaid principal balance (UPB), and the other on February 5, covering $392 million of UPB, according to a report in the Wall Street Journal.
The FHFA says the new rules are based on a review of those transactions, including what steps the investors took after acquiring the loans.
Most investors generally follow the practices outlined in the FHFA's new rules already. However, there is some question as to the impact the new rules might have on future sales of NPLs by the GSEs, considering that the additional efforts to keep borrowers in their homes will be codified into the deals and must be adhered to by the investors. Will investors have the same appetite for these portfolios of NPLs considering the time, effort and extra cost of providing alternatives to foreclosure?