Fannie Mae and Freddie Mac have nailed down the promised details the life-of-loan exclusions related to their representation and warranty framework. Under the direction of the Federal Housing Finance Agency (FHFA) the two government sponsored enterprises (GSEs) announced the changes on Thursday afternoon.
Press releases from the two mortgage companies said the enhancements to the framework are expected to help reduce lender concerns about when a GSE may demand a loan be repurchased. While the framework provided relief as explained below there remained so-called "life of loan" exclusions which permitted the GSEs to involve repurchase requests as long as there was an unpaid balance on the loan.
Freddie Mac said that concerns over these exclusions have caused some lenders to impose credit overlays, that is underwriting guidelines such as higher credit scores, more stringent that those required by the GSEs themselves. These overlays may have limited access to mortgages to a number of creditworthy borrowers.
Under the current framework, the bulk of which applies to loans purchased on or after January 1, 2013, lenders are granted relief from the responsibility of repurchasing a loan under their representations and warranties obligations if the borrower makes 36 months of timely payments on loans (12 months of timely payments on HARP or Refi PlusTM loans) or the loan successfully passes a full quality control review by the respective GSE purchaser.
The changes announced on Thursday provide specific requirements under which a repurchase request could be made even if a loan had earned relief by satisfying the above requirements. These include a "significance test" related to misrepresentation or data inaccuracies. This test is intended to clarify that the GSE would not have purchased the loan had it known about the inaccurate information up front.
The revision also changes the representation and warranty regarding legal compliance. The GSE can only seek repurchase of a loan either before or after it is granted relief under the framework if the GSE determines that the noncompliance would impair its rights under the note or mortgage, result in direct liability to the GSE or that the lender may have violated applicable federal state and local laws or violated other regulations. The GSEs could enforce a remedy including repurchase for violations across that broad definition of regulations so this section has been amended to specify those applicable regulations. They include foreign assets control regulations, the Fair Housing Act, anti-discrimination provisions of the Equal Credit Opportunity Act, the Securities Exchange Act of 1934, and acts considered unfair, deceptive, or abusive under federal and state laws.
Changes to the framework are effective retroactively to mortgages with settlement dates on or after January 1, 2013 except for any loans for which repurchase requests have already been issued. Changes to the compliance section of the framework are effective for loans purchased on or after November 20, 2014.
Dave Lowman, Freddie Mac's Executive Vice President, Single Family Business, Freddie Mac said the changes go "a long way in providing clarity and certainty to lenders as to when a loan will be subject to a repurchase. Lenders have been specifically concerned that the life of loan exclusions could undermine the selling representation and warranty relief, leaving a back door for the GSE to put loans back to them after granting relief. Addressing these concerns by providing tighter definitions and clarity should encourage Sellers to serve a broader range of qualified borrowers."
"The clarity and certainty we're providing today is crucial for lenders to increase access to mortgage credit," said Andrew Bon Salle, Fannie Mae's Executive Vice President, Single-Family Underwriting, Pricing and Capital Markets. "There are qualified borrowers who are not being served in today's market. With this clarity, lenders should have greater confidence in lending to Fannie Mae's full credit standards and making mortgages available to more borrowers."
FHFA Director Melvin Watt said the details released by the GSEs clarifying the loan-of-life exclusions are a positive step forward for housing finance. "Concerns about when a mortgage loan might be subject to repurchase, along with other market factors, have contributed to increased credit overlays that drive up lending costs and reduce access to credit. Clarifying these life-of-loan exclusions will not impact the credit standards of Fannie Mae or Freddie Mac, but they will provide greater certainty for all parties, facilitate greater liquidity and increase access to credit without compromising safety and soundness."
Mortgage Bankers Association President and CEO David Stevens said his organization applauds the announcements which represent a significant step toward representation and warranty reform that would clarify lenders obligations and reduce the credit overlays that harm borrowers.