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Th e M Rep o RT | 43 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SERVICING the latest FHFa Proposes Financial requirements for agency seller/servicers Minimums for net worth, capital ratio, and liquidity criteria must be met to do business with the GSes. t he Federal Hous- ing Finance Agency (FHFA) announced pro- posed new minimum financial requirements for mortgage sellers and servicers to do business with Fannie Mae and Freddie Mac. The proposed requirements include minimums for net worth, capital ratio, and liquidity criteria that must be met by servicers and sellers to do business with the GSEs. FHFA said the purpose of the requirements is to ensure safe and sound operations of the GSEs and at the same time further FHFA's goal of promoting efficient, competitive, liquid, and resilient national finance markets for hous- ing. The proposed criteria will also provide stakeholders and industry participants with greater transpar- ency, consistency, and clarity, as di- rected by the 2014 and 2015 Fannie Mae and Freddie Mac scorecards. FHFA and the GSEs will obtain feedback from regulators, industry participants, and other stakeholders and improve their understanding. According to FHFA's announce- ment, all servicers will be expected to comply with the proposed minimum requirements in order to do business with either of the GSEs six months after finalization. The proposed minimum re- quirements are as follows: • For net worth (for all sellers and servicers), a base of $2.5 million plus 25 basis points of unpaid principal balance for all loans serviced. • For capital ratio (for non-depos- itory sellers and servicers), the proposed minimum requirement is a tangible net worth and/or to- tal assets of less than or equal to 6 percent. Regulatory standards will still apply for depository institutions. • For liquidity, the proposed minimum requirement for all non-depository sellers and ser- vicers is 3.5 basis points of total agency serving, plus incremental 200 basis points of total nonper- forming agency servicing that exceeds 6 percent of the agency's total servicing UPB. Institutions may include the following as assets for liquidity: cash and cash equivalents, available for sale or held for trading investment grade securities that include agency mortgage-backed securities and obligations of the GSEs and Treasury; and the unused/un- available portion of committed servicing advance lines. As with capital ratio, the regulatory stan- dards for liquidity will still apply for non-depository institutions. According to FHFA's an- nouncement, the agency antici- pates that the proposed minimum requirements will be finalized sometime during the second quarter of 2015 and will go into effect approximately six months later. FHFA and the GSEs plan to reach out to help sellers and servicers better understand the re- quirements and prepare for them when they go into effect. FHFA said the purpose of im- plementing the new requirements will be to "improve the safety and soundness of the enterprises by strengthening their minimum seller/servicer standards"; "create a more consistent framework for seller/servicer eligibility"; "provide the industry with greater clarity about the enterprises' seller/ser- vicer counterparty requirements"; and "provide for consistent application of the new eligibility requirements by both enterprises, subject to enterprise discretion where appropriate." including a long-running inves- tigation from New York's top financial regulator that eventually resulted in a $150 million settle- ment. The company plans to take an additional $50 million charge to its Q 4 expenses as a result of that agreement after already set- ting aside $100 million in Q 3. Aside from that, he said Ocwen closed 25 exams from state regula- tors in the past year, leaving 21 pending investigations still open. Based on current dealings with regulators, the company doesn't expect any major fines, penalties, or settlements ahead, though man- agement does anticipate resolving two legacy matters for a total of less than $1 million, he added. Also expected to take a toll on Q 4 earnings is an expected increase in servicing expenses and uncollectable receivables and a $13 million expense for third-party monitoring costs. "As a result of the items just discussed and other fourth-quarter events, we expect to record a loss in the fourth quarter of 2014 and for the total year," Faris wrote. Looking ahead, Faris anticipates "the level of these types of expens- es will decrease significantly" this year as Ocwen clears out some of its remaining legacy issues. Ocwen said that its servicer ratings have fallen below the minimum criteria established in 482 private-label securities agreements. However, the company is currently unaware of plans from any securi- ties trustee to move its servicing as a result of those changes. Responding to the Fitch an- nouncement, Faris said recent actions have been based largely on public information and "have not pointed to actual servicing performance deficiencies." "Objective data on PLS per- formance continues to show that Ocwen excels in managing loss mitigation timelines, bringing borrowers current on their pay- ments and keeping them current," he said. "For these reasons, we believe it is in the best interests of all stakeholders to continue to keep Ocwen on the job." Investors continue to be skit- tish. In light of the recent strug- gles, New York-based investor Mangrove Partners Master Fund, one of the 10 largest sharehold- ers in Home Loan Servicing Solutions, delivered a letter to the HLLS board of directors with regards to HLSS's relationship to Ocwen. Mangrove Partners originally wrote to the HLLS board request- ing that the mortgage servicer terminate its relationship with Ocwen immediately. "We believe that continuing to expose HLSS to Ocwen-related risks by leaving the Ocwen rela- tionship intact constitutes a derelic- tion of your duty to the company and a grave risk to all shareholders," Mangrove Partners wrote in the let- ter. "Your response was inadequate. As a result, it is our intention to nominate a slate of replacement di- rectors for election this year because time is not the company's friend, and you as the board are showing no signs of taking concrete action to protect shareholders in this seri- ous situation." Mangrove Partners contended in the response letter that the downgrading of Ocwen's ratings in October by Moody's consti- tuted a termination event that al- lows HLLS to exercise contractual rights to terminate its relationship with the troubled Atlanta-based mortgage servicer. According to the letter, a termination event is defined as "the occurrence of any one or more of the following events …(e) seller [Ocwen] fails to maintain residential primary servicer ratings for subprime loans of at least 'average' by Standard & Poor's Rating Services." The letter stated that yet an- other termination event occurred when Ocwen's ratings were downgraded again, this time by Morningstar. "We believe that there are com- pelling reasons why HLSS should immediately begin the process of exercising its rights to direct Ocwen to transfer the servicing rights to one or more different servicers," the letter stated. "Most importantly, servicing transfers will isolate HLSS from the risks of an ongoing relationship with Ocwen."