Recent analysis of single-family loans owned by Fannie Mae has shown that while overall creditworthiness has improved, measures of loan quality, such as data accuracy and appropriate evaluation of the underwriting data in the loan file, remain a challenge for many lenders, including credit unions.
Because errors in data quality and underwriting analysis may lead to repurchase requests or funding or pooling delays due to delivery issues, Fannie Mae’s Loan Quality Initiative (LQI) is aimed at reducing these errors before delivery to Fannie Mae. Fannie Mae’s traditional reliance on the representation and warranty model often leads to discovery of these errors after delivery. LQI will facilitate early discovery, and help credit unions have more certainty about repurchase exposure. Despite the consistently high-quality loan performance seen among credit unions’ deliveries to Fannie Mae, it’s critical to ensure that credit unions understand the Government-Sponsored Enterprises’ (GSEs) eligibility guidelines as they consider ways to pass on future interest-rate or credit risk on long-term fixed-rate assets.
Even before the market downturn and through the present, Fannie Mae has consistently found that a large percentage of its loans ending up in foreclosure have data quality issues. Fannie Mae analyzed a large number of loans to determine what drives repurchase requests and find ways to help reduce them. The LQI was devised to get at the root of these defects and prevent them earlier in the process. Fannie Mae is seeking loan delivery data that is complete, accurate, and fully reflective of the terms of the mortgage.
Loan Quality Vs. Loan Performance
Some credit unions may be concerned about whether they have the reserves to buy back defective loans as the industry increases its scrutiny on current deliveries, but it’s important to note that the triggers for these requests have not changed. Fannie Mae only asks for repurchase on loans that do not meet its underwriting and/or eligibility requirements, as set forth in the Selling Guide and lenders’ contracts. It’s important to distinguish loan quality from loan performance. Delinquencies in newer loans certainly have come down, but in terms of loan quality – measured by whether the information in the file supports the loan delivered – Fannie Mae has seen less improvement than might be expected, which remains a big concern.
The LQI is a multifaceted approach to assisting lenders in originating quality loans, with a variety of resources and upgrades to come in the months ahead. Among them, Fannie Mae is transitioning a number of “warning edits” to “fatal edits” in the Loan Delivery system so more loans with defects are stopped from being delivered to Fannie Mae.
To further help credit unions identify and correct potential eligibility and data issues, Fannie Mae now offers EarlyCheck, an optional new service that provides access to Fannie Mae data checks prior to loan delivery.
Industry-Standard Data Program Supports Loan Quality
Another major aspect of the LQI that’s designed to improve loan data accuracy is the Uniform Mortgage Data Program (UMDP), which provides an industry-standard framework for collection of expanded loan and appraisal data.
Fannie Mae’s extensive analysis prior to undertaking the LQI showed issues with property value to be one of the key drivers of loan defects. To strengthen risk management related to property value, Fannie Mae moved last year to work with Freddie Mac toward standardization of appraisal data and requiring electronic submission of appraisal reports.
The Uniform Loan Delivery Dataset, or ULDD, is another component of the UMDP through which Fannie Mae and Freddie Mac are implementing a common approach for loan delivery data standards to minimize implementation differences for lenders and vendors. As of September 2011, the ULDD framework will be required for delivery of loans to either Fannie Mae or Freddie Mac, so it’s important for credit unions to work with their loan delivery vendors now to make sure they are adequately preparing for these new requirements.
Although some additional loan data will be requested through the ULDD, it ultimately will strengthen credit unions’ risk management options and provide new ways to combat mortgage fraud. In addition to leveraging technology, Fannie Mae also intends to make staff and resources available to help customers improve their quality control processes.
Through the LQI, Fannie Mae has made a long-term commitment to work with the mortgage industry to improve loan data accuracy and compliance with its eligibility guidelines. Fannie Mae believes this will provide benefits for all industry stakeholders – including credit unions – for years to come. Learn more about the Loan Quality Initiative
Or contact Tammy Trefny, Fannie Mae National Affinity Team, for more information.
To learn how your organization can become approved to sell loans to Fannie Mae, try the new, easy-to-use Path to Approval Toolkit available on eFannieMae.com for information regarding the approval process for single-family lending institutions. Review the toolkit prior to beginning the application process and get detailed information about Fannie Mae’s requirements, easy-to-use checklists, and an approval process flow chart.