A little more than a year ago, Fannie Mae implemented an updated representation and warranty (R&W) framework that provides lenders more clarity, certainty, and transparency about their obligations after delivering a loan. The new framework provides a “sunset” on the seller’s R&W obligation after 36 to 60 months for most loans delivered after January 1, 2013, with some exceptions and limitations. Freddie Mac adopted the same framework under the direction of our conservator, the Federal Housing Finance Agency.
So what has happened in the past year? Fannie Mae has updated our post-purchase review process and implemented a feedback loop to give lenders actionable information that can help them identify and address potential issues in their business processes that impact loan quality, thus helping to manage repurchase risk.
Updated Post-Purchase Review Process
To support the revised R&W framework, we also updated our discretionary post-purchase review (DPPR) process. The DPPR process now includes an electronic assessment of loans approximately 150 days after delivery that performs certain checks to help confirm that they were originated in accordance with applicable underwriting and eligibility requirements. The assessment leverages loan-level evaluation tools to identify loans that may merit further review. The vast majority of loans go through this analysis with no further review or action required.
For the small percentage of loans that are selected for review, Fannie Mae may request the underwriting file for a full review or may choose to evaluate the loan for possible data inconsistencies or inaccurate information. Data validation reports are provided to lenders monthly — we ask them to review the loans listed and work with our staff on data changes, and in some cases pricing changes, that may be required so Fannie Mae can keep those loans on our books.
As part of the updated review process, Fannie Mae provides both loan-level and lender-level feedback to help lenders identify and address potential issues in their business processes.
We now provide monthly Loan Quality Review Results reports to our lenders on the results of completed full file reviews. Eligibility violations that trigger a separate repurchase request to the lender are summarized on the reports. The reports also provide feedback to lenders on deficiencies, including missing documents, that were identified in a loan file review but are not eligibility violations — the mortgage was deemed overall to be of acceptable quality.
These feedback mechanisms — the monthly loan quality and data validation reports and any repurchase requests — can help lenders identify and remediate any patterns of issues in their loan manufacturing process.
Does Loan Quality Mean Zero Defects?
Lenders often ask Fannie Mae if our updated, more rigorous post-purchase process implies that we have an expectation of zero defects in loans delivered to us. We always aspire to no eligibility defects and encourage our lenders to produce defect-free loans, but we do not evaluate lenders by a zero-defect-rate standard. (For more on this topic, read our FM Commentary, “Should Lenders Have Zero-Defect-Rate Targets for Loan Production Quality?”)
Fannie Mae expects each lender to establish its own standards for loan quality that define its credit culture and aid in the development of appropriate controls. Taking advantage of the feedback offered by Fannie Mae on loans delivered to us, in conjunction with an effective quality control program in the lender’s organization, can help create a culture of quality and mitigate repurchase risk.
Investing in quality is an essential part of the mortgage business in today’s environment. It may seem daunting at times, but rather than focusing on the cost of quality, our guidance to lenders is to keep your eye on achieving a return on quality.
Please visit Fannie Mae’s Loan Quality web page for resources to help build effective strategies to manage risk through a focus on loan quality.
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