The Federal Housing Finance Agency (FHFA) has moved to lift a lot of the uncertainty about lender risk and responsibility with a new framework for representation and warranties on loans sold after the first of next year.  The guidance was released this morning and applies to conventional loans sold or delivered to Fannie Mae and Freddie Mac (the GSEs) after January 1, 2013

FHFA said, "The objective of the new framework is to clarify lenders' repurchase exposure and liability and moves the focus of quality control reviews from the time a loan defaults to the time the loan is delivered to the GSEs.  Loans written prior to January 1, 2013 are not included in the new rules nor are modified loans including modifications to HARP.  Under the new framework:

  • Lenders will be relieved of certain repurchase obligations when loans meet specific payment requirements. For example, relief from reps and warranties will be provided for loans with 36 months of consecutive on-time payments.
  • Home Affordable Refinance Program (HARP) loans will be eligible for relief after an acceptable 12-month payment history beginning at the point the GSEs acquire the loan.
  • The GSEs will make detailed information about exclusions from relief such as violations of prevailing laws available to lenders and will continue to make a range of tools available to help improve loan quality.

A review conducted by FHFA found that previous loan repurchase requests were based on substantive underwriting and documentation deficiencies which led to substantial losses for the GSEs and thus for taxpayers.  These problems arose primarily from loans originated prior to 2008 when the GSEs were taken into government conservatorship.   Based on this review FHFA is directing the GSEs to:

  • Conduct quality control reviews earlier in the loan process, generally between 30 and 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, focusing on identifying significant deficiencies.
  • Leverage data from the tools currently used by the GSEs to enable earlier detection of potentially defective loans.
  • Make the process for appealing repurchase requests more transparent for lenders.

FHFA stressed that the new guidance applies to all single family mortgage loans that meet the specified eligibility requirements including Refi Plus/DU Refi Plus, Relief Refinance for Same Servicers, and Open Access.  The 12-month payment relief will apply to these loans.

FHFA said it is working closely with the GSEs to make additional changes that will provide more efficient standards for the servicing of GSE-eligible mortgages with a goal to working towards a common set of servicing performance metrics and break remedies for performing loans, investor reporting, and management of non-performing loans.

Edward J. DeMarco, Acting Director of FHFA said "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.  These efforts contribute to a firm foundation for a new sustainable housing finance system for the future."