Fannie Mae, Freddie Mac get servicing valuation rules from FHFA

The Federal Housing Finance Agency issued an advisory bulletin regarding the government-sponsored enterprises' need to establish and implement risk management policies and procedures for valuing and monitoring mortgage servicing rights portfolios.

"Enterprise-wide risk management policies and procedures should be commensurate with an Enterprise's risk appetite, and based on an assessment of seller/servicer financial strength and MSR risk exposure levels," the bulletin stated. "Although seller/servicers assign values to their MSRs, the Enterprises should have their own processes to evaluate the reasonableness of seller/servicer MSR values."

This bulletin applies only to single-family MSR portfolios and is effective on April 1.

In August, the FHFA and Ginnie Mae jointly released updated minimum financial-eligibility standards for their counterparties.

MSRs are important for Fannie Mae's and Freddie Mac's evaluation of a seller/servicer's financial capacity, said the latest bulletin, issued on Jan. 12.

The FHFA warned the GSEs not to accept MSR portfolio evaluations from the seller/servicer because of differing model assumptions that contribute to volatility in values. Instead Fannie Mae and Freddie Mac need to get their own assessment.

"The Enterprise should document the rationale for the MSR valuation and ensure it is appropriate and prudent for its intended use in managing counterparty credit risk," FHFA said.

The valuation requirement is not restricted to Fannie Mae and Freddie Mac MSRs owned by seller/servicers, but other investor types as well. FHFA admitted that the availability of data with these portfolios can be limited.

"However, seller/servicers regularly provide the Enterprise with information on their MSR portfolios, such as general mortgage loan characteristics and certain MSR valuation assumptions, along with the MSR value," the bulletin said. "Some seller/servicers also commission independent audits and third-party valuations that may contain additional MSR portfolio information."

The GSEs can use this information to assess the reasonableness of the valuation for the mortgages they don't own or guarantee and adjust those accordingly, FHFA continued.

Fannie Mae and Freddie Mac can use third-party providers for various aspects of the MSR appraisal as long as adequate processes and controls are in place.