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» FHFA CALLS EMINENT DOMAIN 'THREAT' TO GSES, MAY CONSIDER LEGAL ACTION Local governments considering the use of eminent domain to seize underwater mortgages may have to deal with the Federal Housing Finance Agency (FHFA) before moving forward with the plan. In a statement issued last month, FHFA stated it may "initiate legal challenges" to local or state actions that authorize the use of eminent domain to restructure mortgage contracts impacting Fannie Mae and Freddie Mac. Another action the GSEs' regulator may employ is to limit or stop business activity in jurisdictions that authorize the use of eminent domain to seize mortgages. FHFA says its decision is based on the law and input the agency received. "[T]here is rational basis to conclude that the use of eminent domain by localities to restructure loans for borrowers that are 'underwater' on their mortgages presents a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks," wrote Alfred M. Pollard, FHFA general counsel. Pollard also stated the use of eminent domain "would run contrary to the goals set forth by Congress for the operation of conservatorships by FHFA." FHFA's statement follows reports that Freddie Mac might take legal action to stop Richmond, California, from using eminent domain to seize negative equity mortgages. Recently, officials in the city approved adoption of the controversial approach, but the city was hit with a lawsuit shortly after from an institutional investor group. Mortgage Resolution Partners (MRP) is the firm that's been actively approaching different cities to propose the use of eminent domain as a solution for underwater mortgages. As part of the plan, MRP would provide the funds to refinance the mortgages and take a government-approved flat fee per mortgage, according to the firm's website. KNOW THIS The enterprises are required to contract their portfolios at an annual rate of 15%, which will reduce both retained portfolios to $250 billion by 2018. VISIT US ONLINE @ DSNEWS.COM FREDDIE MAC RECORDS SECOND LARGEST PROFIT IN ITS HISTORY Freddie Mac had a banner second quarter, pulling in its second-largest profit in company history. According to Freddie Mac's quarterly earnings report, Q2 2013 net income totaled $5 billion, up about $407 million from its firstquarter profit. It marked the seventh straight quarter Freddie's numbers have been in the black. Comprehensive income was $4.4 billion compared to Q1's $7 billion. The GSE also announced its dividend obligation to Treasury will be $4.4 billion in September, bringing its aggregate cash dividends paid to $41 billion. Because dividend payments don't reduce prior draws, Treasury still maintains liquidation preference on $72.3 billion of the company's preferred stock. Freddie said credit quality also improved, with post-2008 loans representing 70 percent of the company's single-family credit guarantee portfolio in Q2 and relief refinance loans representing 20 percent. Freddie's earnings report comes at a pivotal time in the company's history, with industry representatives, lawmakers, and even President Obama calling for a plan to wind down the GSEs and reduce the government's role in the mortgage market. FANNIE REPORTS $10.1B PROFIT Fannie Mae's second-quarter profits nearly doubled year-over-year, the D.C.-based GSE reported. Net income totaled $10.1 billion in Q2 2013 compared to $5.1 billion in Q2 2012. It was the sixth consecutive quarter of profit for Fannie Mae. Comprehensive income totaled $10.3 billion, again nearly double that of the same quarter last year ($5.4 billion). According to the GSE's earnings report, the second quarter's strong numbers were "driven primarily by continued stable revenues and boosted by a significant increase in home prices in the quarter, which resulted in a reduction in the company's loss reserves." The yearly improvement was also helped by gains on the company's assets recorded at fair value (due to increases in interest rates) and an increase in credit-related income. As of June 30, Fannie Mae's net worth was reported at $13.2 billion—$10.2 billion of which will go to Treasury as dividends, bringing aggregate dividends paid to $105 billion. Under the terms of the GSEs' revised bailout agreements, each must maintain a reserve of $3 billion, with any amount earned over that threshold relinquished to the government. GSES ANNOUNCE CHANGES TO SERVICER INCENTIVES Fannie Mae and Freddie Mac have eliminated the $500 incentive for completed borrower response packages. The change went into effect August 1, according to separate bulletins issued by the GSEs. Freddie Mac explained that the decision to do away with the incentive stemmed from the GSEs' streamlining of several loss mitigation programs which eliminated the requirement for a borrower response package. The GSEs have also stopped assessing compensatory fees for servicers that don't meet the minimum performance benchmark set for borrower response packages for all collection periods with a start date on or after March 1, 2013. At the same time, the GSEs announced an increase in servicer incentives for loan restructurings under the Home Affordable Modification Program (HAMP), starting April 1, 2014. Compensation will go up by $500 for every completed HAMP modification that meets the servicing guide requirements. With the increase, if a borrower is fewer than 120 days delinquent when the HAMP trial period plan begins, the incentive amount will be $2,100. It will be $1,700 for borrowers past due by 121 to 210 days, and $900 for borrowers delinquent by more than 210 days. The increased incentives will be paid based on information provided by servicers through the HAMP servicer Web portal. Therefore, the GSEs stressed, payment is contingent upon servicers' timely and accurate reporting of loan information. KNOW THIS Fannie's economic team predicts mortgage rates will continue to rise gradually, averaging 4.7% by the end of this year. 29

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