The Federal Government Issues New Guidelines To High Risk Sellers- Is It Too Little Too Late?

As of September 2011, high-risk counterparties managed mortgage portfolios of $955 billion and exposed the Enterprises to an estimated $7.2 billion in potential financial losses. In addition, the Enterprises’ 10 largest servicers were responsible for handling $3.1 trillion in outstanding mortgages. As shown by the more than 40 seller/servicers that the Enterprises have suspended or terminated since 2007, and by the Enterprises’ estimates of up to $6.1 billion in losses following the failure of just 4 high-risk seller/servicers, the Enterprises face significant risks from their counterparties.
The Enterprises support the secondary mortgage market by purchasing residential mortgage loans from lenders. They may hold these mortgages as their own investments or bundle them into mortgage-backed securities (MBS)””typically with guarantees covering principal and interest payments””for sale to other investors. MBS issued or guaranteed by government agencies (e.g., the Government National Mortgage Association) or government-sponsored enterprises, such as the Enterprises, are referred to as ” agency MBS.” In 2011, the agency MBS market of $5.5 trillion was more than four times larger than the non-agency MBS market.
Selling and Servicing Loans for the Enterprises
The Enterprises’ mortgage-related business is considerable. The Enterprises owned or guaranteed $4.6 trillion of the nation’s estimated $10.3 trillion in outstanding single-family mortgages as of September 30, 2011. In other words, the Enterprises own or guarantee almost half of all mortgages on homes in the United States.
The same lenders that sell these mortgages to the Enterprises frequently also service the loans for them. Servicing includes much of the day-to-day work involved with mortgages, such as:
ï‚· Collecting payments from borrowers;
ï‚· Maintaining escrow accounts for property taxes and insurance; and
ï‚· Handling mortgage modifications, defaults, and foreclosures.
In 2011, the Enterprises worked with over 2,000 servicers.
Doing such a large volume of business with multiple counterparties poses risks to the Enterprises when their success depends on the counterparties’ stability.3 Indeed, as demonstrated by the recent housing crisis, counterparties can fail rapidly in response to adverse market conditions.
FHFA GUIDELINES