GSEs officially update representation and warranty policies

Analysts say impact of long-awaited changes may be minimal

Fannie Mae and Freddie Mac both announced changes to their respective representation and warranty policies, following through on an announcement made by Federal Housing Finance Agency Director Mel Watt at the Mortgage Bankers Association Annual Convention & Expo in October.

During his speech at the MBA Expo, Watt said that the FHFA was planning to clarify Fannie and Freddie’s representations and warranty policies to help reduce repurchases.

"We know that the Representation and Warranty Framework did not provide enough clarity to enable lenders to understand when Fannie Mae or Freddie Mac would exercise their remedy to require repurchase of a loan,” Watt said at the time.

“And, we know that this issue has contributed to lenders imposing credit overlays that drive up the cost of lending and also restrict lending to borrowers with less than perfect credit scores or with less conventional financial situations."

Watt said the FHFA's changes include clearly defining life-of-loan exclusions, which fall into six categories:

1.  Misrepresentations, misstatements and omissions

2.  Data inaccuracies

3.  Charter compliance issues

4.  First-lien priority and title matters

5.  Legal compliance violations

6.  Unacceptable mortgage products

Watt also said the FHFA would be setting a minimum number of loans that must be identified with misrepresentations or data inaccuracies to trigger the life-of-loan exclusion, so that the GSEs will be responding to a pattern of misrepresentations or data inaccuracies, not just outliers.

Now, Fannie and Freddie have made the changes Watt announced official.

“Today’s updates include a significance test for post-relief date repurchases related to misrepresentations or data inaccuracies that is intended to clarify that Fannie Mae will only seek repurchase on these loans if Fannie Mae would not have purchased the loans had we known the accurate information at the time of delivery,” Fannie said.

In a note to clients, analysts from Wells Fargo (WFC) provide additional clarification on the changes made, including:

Misrepresentations, misstatements and omissions exclusion clarified to involve three or more loans by the same lender, were made pursuant to a common pattern, and are significant (defined as using true and accurate information, the loan would not have been eligible for delivery, or the loan would have been eligible but under different terms). Loans that could be considered part of a pattern can include loans that have already obtained relief or not.

Data inaccuracies exclusion clarified to involve five or more loans with the same data element inaccuracy, the Uniform Loan Delivery Dataset information differs from the loan files and are significant (defined as using true and accurate data elements, the loan would not have been eligible for delivery, or the loan would have been eligible, but under different terms). Loans that could be considered part of the set can include loans that have already obtained relief or not.

Additionally, Fannie and Freddie announced that the life-of-loan exclusions are retroactive to loans that were purchased or pooled on or after Jan. 1, 2013.

Freddie Mac said that it plans to update the compliance-with-law definition in its selling guide to provide more certainty on how it will enforce remedies for compliance with laws. The change is effective for mortgages with settlement dates on or after Nov. 20, 2014, Freddie said.

“The release of details today by Fannie Mae and Freddie Mac clarifying the definition of life-of-loan exclusions and when they apply is a positive step forward for housing finance,” Watt said after Fannie and Freddie made the changes official.

“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," Watt said.

Dave Lowman, Freddie Mac’s executive vice president of single-family business said that the changes “go a long way” in terms of 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,” Lowman said. “Addressing these concerns by providing tighter definitions and clarity should encourage sellers to serve a broader range of qualified borrowers."

Andrew Bon Salle, executive vice president of single-family underwriting, pricing and capital markets at Fannie Mae, said that the changes should allow lenders to lend with more confidence.

"The clarity and certainty we’re providing today is crucial for lenders to increase access to mortgage credit,” Bon Salle said. “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.”

David Stevens, president and CEO of the MBA, hailed the changes.

“MBA applauds these announcements and thank the GSEs and FHFA for their effort,” Stevens said. “These changes represent a significant step toward substantive rep & warrant reform that will clarify lenders’ obligations and reduce undue underwriting overlays that restrict access to credit.

“Similarly the revisions made to compensatory fees are a significant positive step forward towards a process with properly structured incentives to deter poor servicer performance. The new timelines will also reduce the severity of assessments in cases where the existing timelines do not accurately reflect the actual time it takes to foreclose. Finally, raising the de minimis exception should provide substantial compensatory fee relief to small and mid-size mortgage servicers.

“MBA worked hard to ensue these changes happened, and we look forward to continuing to work with the GSES and FHFA on other aspects of these decisions.”

Despite the high praise from Watt, Lowman, Bon Salle and Stevens, Wells Fargo analysts Greg Reiter, Mark Fontanilla, Randy Ahlgren, and Maria Mascia said that the changes will have a minimal impact on mortgage lending.

“In our opinion, the net effect of today’s major clarifications above remains only modestly incremental to mortgage lending,” the Wells Fargo analysts said.

“Furthermore, while the Framework changes may help clarify instances of repurchase risk, the increased level of compliance from an operational cost standpoint still persists. In addition, we still believe it remains to be seen whether the lending community risk tolerance on whole is meaningfully relaxed as a result of the official Framework updates.”

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