FHFA issues guidance on mortgage servicing rights for managing counterparty credit risk

The Federal Housing Finance Agency today released an advisory on the valuation of mortgage servicing rights for managing counterparty credit risk. The notice is intended to communicate FHFA’s supervisory expectations for Fannie Mae and Freddie Mac “to establish and implement risk management policies and procedures for monitoring and valuing seller/servicers’ mortgage servicing rights.” This bulletin only applies to MSRs for single-family mortgage loans and is effective April 1.

“Enterprise-wide risk management policies and procedures should be commensurate with [Fannie and Freddie]’s risk appetite and based on an assessment of seller/servicer financial strength and MSR risk exposure levels,” according to the bulletin, which also noted that although seller/servicers assign values to their MSRs, Fannie Mae and Freddie Mac “should have their own processes to evaluate the reasonableness of seller/servicer MSR values.”

The advisory includes guidance on objective evaluation of MSR values; MSR valuations for mortgage loans owned or guaranteed by the Fannie and Freddie and stress testing; MSR valuations for mortgage loans not owned or guaranteed by the enterprises; market data input; use of third-party providers; frequency of evaluations; and discount to MSR values when servicing rights are terminated.

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