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As part of their risk management processes, Fannie Mae and Freddie Mac (the Enterprises) each have established an approval process for seller/servicers that includes both ascertaining that seller/servicers meet minimum financial eligibility requirements and monitoring compliance of approved seller/servicers.
A seller/servicer must meet or exceed minimum financial requirements in order to be an approved Enterprise seller/servicer. The minimum financial requirements are not, by themselves, measures of adequacy. Accordingly, the Enterprises may institute requirements beyond the minimum financial requirements for certain seller/servicers due to situations including, but not limited to, overall complexity or other evidence of heightened risk embedded in the business model or financial condition.
The minimum financial eligibility requirements are not regulatory requirements, and a seller/servicer that does not wish to do business with the Enterprises is not required to meet them. The Enterprises do not regulate seller/servicers but, as a matter of prudent risk management, they consider possible risk exposure from contractual relationships with seller/servicers and assess, monitor, and take appropriate actions to address the risks to which they are exposed in their business relationships.
The 2015 Eligibility Requirements became effective on December 31, 2015, and have remained in effect with minor modifications. The 2015 Eligibility Requirements established minimum levels of capital and liquidity to be maintained by seller/servicers to service single-family mortgage loans guaranteed or owned by the Enterprises. The Enterprises use the financial eligibility requirements to monitor and manage risk exposures to non-depository seller/servicers while largely relying on banking regulators’ prudential capital and liquidity standards as financial requirements for depository counterparties. Under the financial eligibility requirements, both depository and non-depository seller/servicers are subject to the same tangible net worth requirements.
Even with the 2015 Eligibility Requirements in place, the Federal Housing Finance Agency (FHFA) and the Enterprises are continually focused on mitigating the risk presented by the Enterprises’ non-depository counterparties. In 2018, FHFA instructed the Enterprises to evaluate the appropriateness of the requirements for non-depository seller/servicer Enterprise counterparties. In 2019, FHFA instructed the Enterprises to “continue mortgage servicing and asset management efforts that promote stability and readiness for more challenging market conditions” and “assess readiness of servicers...for an economically stressed environment.”1 FHFA initially released Servicer Eligibility 2.0 proposed requirements for public input on January 31, 2020 (“2020 Proposal”).2
The 2020 Proposal was intended to strengthen the Enterprises’ Seller/Servicer Eligibility Requirements and provide transparency and consistency of capital and liquidity required for non-depository seller/servicers.
Specifically, the 2020 Proposal focused on improving the 2015 Eligibility Requirements by incorporating cost and risk assumptions that were not previously considered and re-evaluating modeling assumptions and inputs, given changes in the servicing environment.
Finally, where the 2015 Eligibility Requirements captured most of the major cashflows associated with seller/servicer capital and liquidity needs, the 2020 Proposal considered additional operational and financing costs.
As it had with the 2015 Eligibility Requirements, FHFA expected to issue updated requirements as a directive to the Enterprises under its authority as Conservator. However, as a result of the global COVID-19 pandemic (pandemic), FHFA announced on June 15, 2020, that it would assess and re-propose the minimum financial eligibility requirements considering lessons learned from market events in reaction to the pandemic. Lessons learned include the:
Impact of higher delinquency and costs associated with servicing mortgage loans, exposing the Enterprises to increased levels of counterparty risk
Need to cover seller risk as a result of liquidity challenges experienced by mortgage sellers at the onset of the pandemic
Importance of higher requirements for large non-depository servicers that hold a substantial portion of Enterprise servicing
Need to differentiate servicer liquidity requirements based on differences in remittance type
Enhancements to the 2015 Eligibility Requirements
FHFA and Ginnie Mae staff met regularly to discuss these requirements prior to their release. FHFA understands the importance of the governing bodies discussing requirements that impact both Ginnie Mae issuers and Enterprise seller/servicers, while reserving the right to differ if needed. Tables 1 through 3 below highlight these alignment efforts and provide a side-by-side comparison of each agency’s requirements and effective dates.3
Servicer Eligibility 2.0 requirements contain changes related to incorporating enhanced definitions of capital and liquidity, reducing the procyclicality of the current liquidity requirements, and incorporating lessons learned from the pandemic. The Servicer Eligibility 2.0 requirements also include higher supplemental requirements applicable only to large non-depositories, defined as non-depositories having $50 billion or more of total single-family servicing unpaid principal balance (UPB). Tables 4 and 5 below provide a side-by-side comparison of the existing Servicer Eligibility 1.0 requirements and the enhanced Servicer Eligibility 2.0 requirements.
View the attached PDF for comparison tables.
1 Federal Housing Finance Agency (October 2019). 2020 Scorecard for Fannie Mae, Freddie Mac, and Common Securitization Solutions.
2 Federal Housing Finance Agency (January 31, 2020). FHFA Proposes Updated Minimum Financial Eligibility Requirements for Fannie Mae and Freddie Mac Seller/Servicers.
3 The high-level comparisons contained in this FHFA document do not capture the entirety of Ginnie Mae’s and the Enterprises’ requirements, any interpretation of which should defer to Ginnie Mae’s and the Enterprises’ Guides and related updates.
Media: Adam Russell Adam.Russell@FHFA.gov
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