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As a matter of safe and sound banking practices, banks should have robust policies and procedures in place to address risks associated with foreclosed (or soon to be foreclosed) properties as servicer. Acquiring title to properties through foreclosure—either for the bank or as servicer for another mortgagee—results in new or expanded risks, including operating risk (which may include market valuation issues), compliance risk, and reputation risk. The bank should be sure it has identified all the risks and has policies and procedures for

monitoring and controlling these risks. In establishing and implementing the policies and procedures, bank management and the board of directors should consider, at a minimum, the following obligations and risks:

Obligations and Actions

Fannie Mae and Freddie Mac each have detailed guides setting forth servicer obligations and responsibilities for foreclosed properties and vacant properties in the process of foreclosure. In the case of private securitizations, the obligations are detailed in a document often called a pooling and servicing agreement (PSA).

 Servicers of foreclosed properties may be required to undertake many of the responsibilities of an owner, including providing maintenance and security, paying expenses, serving as the landlord for rentals, and marketing the property.

– Servicers may be required to advance funds for taxes, insurance, and homeowners’ association dues, as well as for maintenance and security expenses, some or all of which may be reimbursable.

– Although rehabilitation, maintenance, and marketing of foreclosed properties acquired on behalf of Fannie Mae and Freddie Mac are typically handled by Fannie Mae and Freddie Mac, servicers may be required to perform routine upkeep—

including winterization, as needed—until the property is assigned by Fannie Mae and Freddie Mac to a property manager.

– Servicers should ensure they follow Fannie Mae and Freddie Mac’s applicable requirements or PSA requirements and guidelines for performing necessary maintenance and upkeep on the property.

 The bank should maintain appropriate insurance on the property.

 Servicers may be required to file claims with any mortgage insurers.

 Some localities may require registration of foreclosed properties, properties in foreclosure, or vacant properties. Under the PSA or the Fannie Mae and Freddie Mac servicing guidelines, this requirement may be the responsibility of the servicer. Servicers should communicate with localities about other specific requirements with respect to foreclosed residential properties.

 When disposing of foreclosed properties, servicers should look to the PSA or other servicing documents for specific requirements and responsibilities. Servicers may have responsibilities, as described above, under the Protecting Tenants at Foreclosure Act or applicable state law requirements that provide protections to tenants from eviction as a result of foreclosure on the property they are renting.

Additional Issues as Servicer

 A bank acting as a servicer should have sufficient staffing and appropriate third-party vendor oversight to manage the portfolios of foreclosed properties.

 Rehabilitation or improvement of foreclosed properties should comply with local building codes, licensing requirements, and any requirements specified in servicing agreements.

 When disposing of foreclosed residential properties, banks acting as servicers should consider

– contractual requirements for valuing and marketing the properties and addressing defects found at inspection. The servicer may be required to advance funds for these activities, though these funds may be recovered.

– that disposition practices may carry reputation and litigation risks. Even when the servicer follows the disposition requirements in the servicing agreements, the impact of the dispositions reflects on the servicer and could result in reputation risk and risk of litigation.

– opportunities to participate in and coordinate with state and local land bank programs, neighborhood stabilization programs, redevelopment programs, and other anti-blight programs, consistent with servicing agreements.

Bank as Trustee of Securitization Trust Holding Title to Foreclosed Property

The securitization trustee is primarily responsible for (1) holding a lien on trust assets for the benefit of investors who purchase securities issued pursuant to the securitization and

(2) administering the trust in conformance with requisite agreements. The trustee’s duties and responsibilities are established by a PSA, trust agreement, or indenture. These agreements direct a securitization trustee to perform various complex ministerial functions. Such

payments, remitting payments to investors, circulating information to investors, monitoring compliance, and determining if an event of default is triggered.

As permitted by the PSA, the trustee should work with the servicer to ensure the performance of the servicer’s responsibilities. The securitization agreements may require a trustee to appoint a successor servicer or to take over servicing in the event the original servicer fails to perform its duties or defaults. These agreements generally do not grant the trustee any

powers or duties with respect to the foreclosure or the maintenance, sale, or disposition of foreclosed properties. Instead, these responsibilities typically reside with the servicer.

Nevertheless, a bank trustee should be aware of potential reputation and litigation risks when a servicer undertakes foreclosure actions in the trustee’s name as the secured party.

Additionally, if the securitization agreements require a bank trustee to act as a replacement servicer until a successor servicer is appointed, the bank trustee will also be exposed to credit risk.