Alert October 01, 2013

FHFA Issues Guidance on GSEs Seeking Deficiency Judgments

The FHFA released a bulletin establishing supervisory expectations for deficiency balance management for Fannie Mae and Freddie Mac. In October 2012, the FHFA-OIG released a report on FHFA’s oversight of GSE’s deficiency management policies and procedures recommending that the FHFA broaden the scope of its supervision of the GSE’s deficiency management practices (see November 13, 2012 Alert). The bulletin establishes factors that should be considered when making the determination of whether to pursue recovery of deficiency balances as part of a deficiency balance management program. A deficiency balance occurs when proceeds from a foreclosure sale are insufficient to satisfy the outstanding unpaid principal balance and other fees and expenses of a defaulted loan. In certain circumstances the GSEs are entitled to recover deficiency balances from defaulting borrowers, which can include obtaining a deficiency judgment. 

The bulletin provides that the GSEs should maintain formal policies and procedures for their deficiency balance management programs and such programs should identify relevant factors to consider when determining to take action to recover a deficiency balance from a defaulting borrower. These factors should include, among others: (1) jurisdiction of foreclosure; (2) mortgage insurance; (3) loss mitigation efforts on the part of the borrower; and (4) loan/borrower specific factors (e.g., whether the loan was owner-occupied or purchased for investment purposes).