To help ease lender concerns related to loan buybacks – which, in theory, should spur lenders to relax their self-imposed overlays and free up more mortgage credit – government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have updated their respective representation and warranty frameworks.
‘The clarity and certainty we're providing today is crucial for lenders to increase access to mortgage credit,’ says Andrew Bon Salle, executive vice president, single-family underwriting, pricing and capital markets, for Fannie Mae, in a release. ‘There are qualified borrowers who are not being served in today's market. With this clarity, lenders should have greater confidence in lending to Fannie Mae's full credit standards and making mortgages available to more borrowers.’
‘Today's announcement goes a long way in providing clarity and certainty to lenders as to when a loan will be subject to a repurchase,’ adds Dave Lowman, executive vice president, single family business, Freddie Mac, in a separate release. ‘Lenders have been specifically concerned that the life of loan exclusions could undermine the selling representation and warranty relief, leaving a back door for the GSE to put loans back to them after granting relief. Addressing these concerns by providing tighter definitions and clarity should encourage Sellers to serve a broader range of qualified borrowers.’
In January 2013, the GSEs implemented a ‘sunset’ provision that makes it so that securitized loans which 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.
More specifically, lenders are granted relief from buybacks providing that the borrower makes 36 months of timely payments; the borrower makes 12 months of timely payments on HARP or GSE loans; or the loan achieves a successful full-file quality control review by the GSEs.
Then, in May of this year, the Federal Housing Finance Agency (FHFA) and the GSEs announced additional refinements to provide greater clarity around 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.
To add greater clarity to these rules, the GSEs are providing specific requirements under which a repurchase could be sought after relief is granted. This includes a ‘significance test’ for post-relief date repurchases related to misrepresentations or data inaccuracies, so that the GSEs can factor in whether the errors would have prevented a loan from being funded on the front end.
In addition, the GSEs have updated their frameworks so that they can only seek the repurchase of a loan (either before or after relief is obtained under the framework) if they determine the failure to comply would impair their rights under the note or mortgage or result in direct liability, or if the lender may have violated an existing consumer protection law or other regulation.
The updates are retroactively effective for mortgages that have settlement dates on or after Jan. 1, 2013.
During the Mortgage Bankers Association Annual Convention & Expo held in October, Mel Watt, director of the FHFA, said the problem with the current life-of-loan exclusions (i.e. the criteria that establishes when the GSEs are to require a lender to buyback a loan) is that they are too ‘open-ended and make it difficult for a lender to predict when, or if, [the GSEs] will apply one of them.’
To address this, he said, the FHFA would be redefining the criteria that could result in a loan buyback to include the following:
- Misrepresentations, misstatements and omissions;
- Data inaccuracies;
- Charter compliance issues;
- First-lien priority and title matters;
- Legal compliance violations; and/or
- Unacceptable mortgage products.
For loans that have already earned repurchase relief, Watt said that only life-of-loan exclusions can trigger a repurchase under the reps and warranties framework – in other words, nothing other than the six criteria above could result in a buyback.
In addition, Watt said the FHFA would be setting 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 framework include the development of an independent dispute resolution process on the origination side; 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.
In response to the GSEs' announcements, David H. Stevens, president and CEO of the MBA, said, ‘These changes represent a significant step toward substantive rep and warrant reform that will clarify lenders' obligations and reduce undue underwriting overlays that restrict access to credit.
‘Similarly the revisions made to compensatory fees are a significant positive step forward towards a process with properly structured incentives to deter poor servicer performance,’ Stevens said. ‘The new timelines will also reduce the severity of assessments in cases where the existing timelines do not accurately reflect the actual time it takes to foreclose. Finally, raising the de minimis exception should provide substantial compensatory fee relief to small and mid-size mortgage servicers.’
Stevens also added that the ‘MBA worked hard to ensue these changes happened, and we look forward to continuing to work with the GSEs and FHFA on other aspects of these decisions.’