Fannie, Freddie Update Reps And Warrants With New Independent Review Process

Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have implemented an independent dispute resolution (IDR) process for resolving repurchase disputes.

Under the new program, mortgage lenders can submit unresolved loan level disputes to a neutral third-party arbitrator after the appeal and escalation processes have been exhausted.

“The IDR process provides the enterprises and lenders [with] a mechanism for resolving a repurchase dispute and avoiding the possibility that a dispute might languish unresolved for an extended period of time, as has often occurred in the past,” says Mel Watt, director of the Federal Housing Finance Agency (FHFA), overseer of the GSEs, in a statement. “IDR is the final part of the representation and warranty framework, which, taken as a whole, will increase clarity for lenders and will ultimately increase access to mortgages for creditworthy borrowers.”

In order to help relieve lenders’ fear of loan buybacks due to defects, the FHFA has been redefining some of the rules within its representations and warranty framework. The idea is that by giving lenders greater peace of mind that they won’t be penalized for minor loan defects (in particular, the type of defects that would not normally prevent a loan from being funded), lenders will, in turn, free up more credit for consumers, especially those in the “underserved” or non-prime market.

The program should give the mortgage industry a clearer understanding of when Fannie Mae or Freddie Mac will require repurchase of a loan. The FHFA hopes that this, in turn, will lead to mortgage lenders relaxing their internal overlays that tend to restrict lending to borrowers with less than perfect credit scores.

In January 2013, the GSEs implemented a “sunset” provision that makes it so that securitized loans that have performed adequately during the first 36 months after origination are, in effect, exempt from further regulatory review and, thus, are at little risk of becoming buybacks – the idea being that if there were defects in the loan underwriting process, they would have become apparent in the early period in the life of the loan.

Then, in May 2014, the FHFA and the GSEs announced additional refinements to provide greater clarity on the 36-month benchmark, including revising the payment history requirement to allow up to two 30-day delinquencies in the first 36 months after acquisition; providing loan level confirmations when mortgages meet the 36-month performance benchmark or pass a quality control review; and eliminating automatic repurchases when a loan’s primary mortgage insurance is rescinded.

Basically, the GSEs are adding more definition to their “life-of-loan exclusions” – the criteria that establishes when the GSEs are to require a lender to buy back a loan. In the past, these exclusions have been regarded as too “open ended.”

As such, the FHFA has been working to redefine the criteria that could result in a loan buyback, including misrepresentations, misstatements and omissions; data inaccuracies; charter compliance issues; first-lien priority and title matters; legal compliance violations; or unacceptable mortgage products.

The FHFA also recently set a minimum number of loans that must be identified with misrepresentations or inaccuracies to trigger a buyback, so that the GSEs will be responding to a “pattern of misrepresentations” and not just outliers.

Other changes to the rep and warranty framework include the development of cure mechanisms and alternative remedies for lower-severity loan defects and potential modification of servicing representations and warranties with regard to compensatory fees and foreclosure timelines.

Many in the industry regard the new dispute resolution program as the capstone of the revised representation and warranty framework. In a statement, David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA), says the program “is an important final piece” to the GSEs’ efforts to improve the framework and allay lenders’ fears regarding buybacks.

“In its totality, the representation and warranty framework will provide much needed certainty and transparency for lenders of all sizes and help broaden access to credit for borrowers,” Stevens says. “[The] MBA is glad to have contributed to this initiative, and we look forward to continuing to work with FHFA, the GSEs and other stakeholders in helping to create a sustainable lending environment that reasonably expands credit for all borrowers interested in the home buying process.”


Please enter your comment!
Please enter your name here