In the hope of freeing up more mortgage credit for consumers, the Federal Housing Finance Agency (FHFA), overseer of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, is redefining some of the rules within its Representations and Warranty Framework, thus helping to relieve lenders' fear of loan buybacks due to defects.
‘We know that the [existing] Representation and Warranty Framework did not provide enough clarity to enable lenders to understand when Fannie MaeÂ or Freddie Mac would exercise their remedy to require repurchase of a loan,’ said Mel Watt, director of the FHFA, during the Mortgage Bankers Association Annual Convention & Expo in Las Vegas. ‘And, we know that this issue has contributed to lenders imposingÂ credit overlays that drive up the cost of lending and also restrict lending to borrowers with less than perfect credit scores or with less conventional financial situations.’
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.
Then, in May of this year, the 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or pass a quality control review; andÂ eliminating automatic repurchases when a loan's primary mortgage insurance is rescinded.
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, Fannie Mae or Freddie Mac will apply one of them,’ Watt explained.
To address this, the FHFA is 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, the FHFA is 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.
The agency is also adding a ‘significance’ requirement to the misrepresentation and inaccuracies definition, so that the GSEs can factor in whether the inaccuracy would have prevented funding the loan at the front end.
Other changes to the Representation and Warranty 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. Â
‘The enterprises will announce details on these changes in the near future,’ Watt said.
In addition to the changes to the Representation and Warranty Framework, Watt announced that the FHFA is also working with the GSEs "to develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97 percent," meaning, in other words, loans with a 3% to 5% downpayment. This was confirmed later the same day when Timothy Mayapoulos, CEO of Fannie Mae, announced that the GSE would soon begin buying mortgages with 97% LTV.
‘Through these revised guidelines, we believe that the Enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower-down payment mortgages by taking into account compensating factors,’ he said. ‘While this is a much more narrow effort than our work on the Representation and Warranty Framework, it is yet another much needed piece to the broader access to credit puzzle.’
In a statement, David Stevens, president and CEO of the MBA, said Watt's comments ‘represent significant progress in the ongoing dialog between the industry, the FHFA and the GSEs to address several of the issues that are causing the tight credit conditions that have prevented a more robust recovery in the housing sector.
‘Offering lenders better clarity around representation and warranty requirements will ensure lenders are accountable for any material mistakes they may make in the loan process, yet acknowledges the fact that minor, immaterial loan defects should not automatically trigger a repurchase request,’ Stevens said. ‘As a result, lenders will be more confident in offering mortgages to qualified borrowers within the full boundaries of the GSEs' credit requirements.
‘Likewise, rationalizing the GSEs' compensatory fee policies will further encourage lenders to expand lending in a meaningful yet responsible way, and return of loan programs that allow downpayments between three and five percent should be of particular help to low and moderate and first-time homebuyers,’ Stevens added. ‘We look forward to seeing the final policies from FHFA and the GSEs and working with them to implement these and other measures to open access to credit.’