The Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac are launching a new representation and warranty framework for conventional loans sold or delivered on or after Jan. 1, 2013. The new rep and warranty approach –– part of a broader series of strategic initiatives called seller-servicer contract harmonization –– aims to clarify lenders’ repurchase exposure and liability on future deliveries.
“Ultimately, better quality loan originations and underwriting, along with consistent quality control, help maintain liquidity in the mortgage market while protecting Fannie Mae and Freddie Mac from loans not underwritten to prescribed standards,” said Edward DeMarco, acting director of FHFA. “These efforts contribute to a firm foundation for a new, sustainable housing finance system for the future.”
The objective of the new framework, developed at the direction of FHFA, is to clarify lenders’ repurchase exposure and liability on future deliveries. The new rep and warranty approach does not affect loans sold to Fannie Mae or Freddie Mac prior to Jan. 1, 2013. With this new framework:
- Lenders will be relieved of certain repurchase obligations for loans that meet specific payment requirements, for example, rep and warranty relief will be provided for loans with 36-months of consecutive, on-time payments;
- Home Affordable Refinance Program (HARP) loans will be eligible for rep and warranty relief after an acceptable payment history of only 12 months following the acquisition date;
- Information about exclusions for rep and warranty relief, such as violations of state, federal and local laws and regulations will be detailed;
- Fannie Mae and Freddie Mac will continue to make available for lenders a range of tools to help improve loan quality.
The new model moves the focus of quality control reviews from the time a loan defaults up to the time the loan is delivered to Fannie Mae or Freddie Mac. An FHFA review of past repurchase requests issued by Fannie Mae and Freddie Mac revealed that these requests were
based on substantive underwriting and documentation deficiencies. These deficiencies have led to substantial losses for Fannie Mae and Freddie Mac, and hence, taxpayers. Fannie Mae and Freddie Mac will continue to work with their lenders to resolve contractual claims resulting from such deficiencies, arising primarily from loans originated before the conservatorships in September 2008. With the new model FHFA is directing Fannie Mae and Freddie Mac to:
- Conduct quality control reviews earlier in the loan process, generally between 30 to 120 days after loan purchase;
- Establish consistent timelines for lenders to submit requested loan files for review;
- Evaluate loan files on a more comprehensive basis to ensure a focus on identifying significant deficiencies;
- Leverage data from the tools currently used by Fannie Mae and Freddie Mac to enable earlier identification of potentially defective loans;
- Make available more transparent appeals processes for lenders to appeal repurchase requests.
Fannie Mae’s Lender Announcement and Lender Letter, and Freddie Mac’s Lender Bulletin and Industry Letter will provide further details.
The improvements to the representation and warranty process are key elements of the seller-servicer contract harmonization project that supports FHFA’s Strategic Plan for Enterprise Conservatorships announced earlier this year. Additional contract harmonization projects directed by FHFA, including servicer performance metrics and remedies for servicing breaches, will be announced in coming months, the agency said.
As Fannie Mae, Freddie Mac, FHFA, and market participants gain experience with this new approach, it is expected that there will be continued enhancements and improvement in the quality of mortgages delivered.
The agency also released a series of
questions and answers providing additional guidance on the new rep and warranty framework.