While credit unions have been largely spared due to careful underwriting practices, mortgage loan delinquencies and foreclosures industry-wide have increased during the housing crisis and so have Fannie Mae’s requests that lenders repurchase or otherwise remedy loans that do not meet underwriting and eligibility requirements.
Given the increase in volume, it made sense to come up with a way to address lender concerns and provide more transparency and clarity about their repurchase exposure, while also providing Fannie Mae with assurance about the quality of the loans purchased and securitized.
In September, the GSEs and the FHFA announced changes that include releasing a lender from most representation and warranty liabilities on a loan that has 36 months of consecutive, on-time payments, except for those related to a few life-of-loan exceptions such as Fannie Mae Charter Act violations and systemic fraud. Repurchase liability for loans originated under Refi Plus (including HARP) will end 12 months after Fannie Mae purchases the loan.
The new framework reiterates the enforcement options available to the GSEs, including repurchase requests or other remedies.
These and other changes represent a new approach to enforcement of the reps and warranties that lenders make when selling loans to Fannie Mae. These changes won’t restricting lending or access to credit. On the contrary, this new framework will provide lenders with greater assurance about the repurchase exposure of loans they sell.
The new framework will take effect with loans sold or delivered beginning January 1, 2013. It does not modify the reps and warranties now in effect. Lenders must continue to originate high quality loans that adhere to the underwriting policy and delivery requirements specified in the Fannie Mae Selling Guide and other Lender Contracts.
Under the new framework, the GSE will set consistent timelines for lenders to submit loan files for review, perform quality control reviews earlier in the loan process, and conduct a comprehensive evaluation of loan files in order to identify significant underwriting deficiencies.
Fannie Mae is in the process of strengthening our quality control measures. Beginning early next year, we will expand our current random sampling of new mortgage loan deliveries so that we also include targeted, discretionary sampling. Fannie Mae also has technology tools and applications in place to help identify problems earlier in the review process.
The new rep and warranty approach is one of the important deliverables in FHFA’s strategic initiative known as contract harmonization. The initiative seeks to align the GSEs to a set of common principles, standards, and requirements in many of our transactions with lenders. Each enterprise will continue to have its own eligibility and underwriting standards and retain its own respective pricing and risk policies, models, and appetites.
Ultimately, everyone will benefit from better quality originations and underwriting, consistent quality control processes, and transparency throughout the system. We hope our efforts result in greater efficiencies for lenders and better access to mortgage financing for borrowers.
Marianne Sullivan is Senior Vice President for Credit Portfolio Strategy at Fannie Mae. Fannie Mae provides more than 1,100 lenders of all sizes with access to credit and liquidity. While our customers’ business strategies may change, Fannie Mae’s business goal remains constant: to support a stable, liquid, and efficient mortgage market.