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» VISIT US ONLINE @ DSNEWS.COM 21 EXPOSURE TO RISK IS DECLINING FOR GSES—BUT SO ARE REVENUES Seven years after the housing market crashed, serious delinquency rates for most mortgage portfolios are at or near pre-recession levels, and the GSEs are no exception. e GSEs' exposure to credit risk from mortgages originated during the years of the housing bubble continues to be "significant but declining," according to the FHFA's Performance and Accountability Report for Fiscal Year 2015. But in addition to experiencing a decline in exposure to credit risk, the GSEs have also experienced significantly declining revenues. As of the end of FY 2015, only 1.59 percent of residential single-family mortgages backed by Fannie Maewere seriously delinquent—that is, 90 days or more overdue or in foreclosure—while 1.46 percent of mortgages insured by Freddie Mac fell in the same category. Both numbers are below their 2008 levels—and most of the seriously delinquent mortgages that remain in the GSEs' single-family portfolio were originated from 2005 to 2008. "Beginning in 2008, both Enterprises made significant changes to strengthen their underwriting and eligibility standards, which have improved the credit quality of their guarantee books of business and overall credit performance," FHFA said in the report. e GSEs made significant progress in winding down their REO portfolios, which consisted of single-family properties they acquired through foreclosure of through a deed- in-lieu of foreclosure. According to FHFA's report, the combined single-family REO portfolios of Fannie Mae and Freddie Mac declined from 121,730 units at the end of FY 2014 down to 78,738 units at the end of FY 2015. e decline in revenues that has come along with the decline in exposure to credit risk has been swift and solid, which caused even the GSEs' boss, FHFA Director Mel Watt, to declare that Fannie Mae and Freddie Mac could possibly need another taxpayer-funded bailout. In 2013 (just one year after returning to profitability following the $187.5 billion bailout in 2008), the GSEs pulled in a combined net income of $132.7 billion, which was a record for one year. In 2014, the combined net income of the GSEs plummeted to $21.9 billion due to the absence of nonrecurring items, such as various legal settlements and the reversal of valuation allowances associated with deferred tax assets. rough the first nine months of 2015, the GSEs have netted a combined $12.7 billion, which is off the pace of 2014's net income of $21.9 billion. "While risks from the Enterprises' mortgage- related investment portfolios are declining as the size of their portfolios shrinks, revenues from these portfolios are also shrinking," FHFA said in the report. "ese investment portfolios continue to expose the Enterprises to interest-rate risk. Accounting differences for these financial assets and liabilities, including derivatives, give rise to significant earnings volatility when interest rates fluctuate, in part because of how mark-to- market requirements are applied." According to the report, declines in interest rates and a flattening of the yield curve in FY 2015 contributed to fair value losses in three out of four quarters for Freddie Mac—and a net loss of $475 million for Freddie Mac in Q 3 2015. Since the conservatorships began, Fannie Mae and Freddie Mac have returned a combined $239 billion in dividends to Treasury—$51.5 billion more than they received in the taxpayer bailout back in 2008. While both parties have expressed the urgency of ending the FHFA's conservatorship of Fannie Mae and Freddie Mac, which is now more than seven years old, but top Obama Administration officials such as Treasury Secretary Jack Lew have stated that the GSEs will not be recapitalized and released during the final 14 months of Obama's presidency. e House vote on legislation to cap the pay of the CEOs of Fannie Mae and Freddie Mac at $600,000 per year—legislation that the White House supports and Obama is expected to sign— all but assure the conservatorships will continue into 2017. CFPB PLAYS DEFENSE AGAINST PHH CORP.'S APPEAL OF $109 MILLION PENALTY e Consumer Financial Protection Bureau (CFPB) is defending itself against a $109 million penalty the Bureau handed down to PHH Corp. for allegedly accepting kickbacks from mortgage insurers. In June, CFPB Director Richard Cordray, in agreement with a November 2014 recommended decision by Administrative Law Judge Cameron Eliot, decided that the New Jersey-based mortgage services provider had violated the Real Estate Settlement Procedures Act (RESPA) by accepting kickbacks for illegally referring consumers to mortgage insurers as far back as 1995. Cordray ordered PHH to disgorge $109 million, the amount the CFPB claims PHH received in kickbacks. With that decision, Cordray overturned an administrative judge's original disgorgement order of $6.4 million, saying that penalty was too lenient. e Bureau first announced the administrative proceeding against PHH in January 2014 seeking a civil fine, a permanent injunction to prevent future violations, and victim restitution. e $109 million penalty handed down by Cordray is the amount of reinsurance premiums PHH received on or after July 21, 2008, according to the CFPB. Almost immediately, PHH's lawyers filed a petition with the District of Columbia U.S. Circuit Court of Appeals to "modify or set aside civil investigative demand," claiming an abuse of power on the part of the CFPB. In the petition, PHH also questioned the constitutionality of an agency such as the CFPB which is funded by the Federal Reserve but not subject to the Congressional appropriations process and run by a single director rather than a board. Recently, the CFPB defended itself and the $109 million disgorgement in a filing with the D.C. U.S. Circuit Court of Appeals, claiming the penalty was a "small fraction" of the kickbacks and that the $109 million was merely money that the company should have never received to begin with, and therefore in essence not a penalty. A CFPB spokesman told DS News that the Bureau did not comment on pending litigation. A spokesman for PHH Corp. did not immediately respond to a request for comment, but the company did issue a statement in June saying, "We strongly disagree with the decision of the Director. We believe this decision is inconsistent with the facts and is not in accord with well- settled legal principles and interpretations. We continue to believe we complied with RESPA and other laws applicable to our mortgage reinsurance activities. e company did not provide reinsurance on loans originated after 2009." A trio of judges from the District of Columbia U.S. Circuit Court of Appeals later stayed the August 5 deadline by which PHH was supposed to pay the $109 million to the CFPB.

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