Aiming to provide lenders with “more clarity and transparency” and encourage increased access to credit to worth borrowers, Fannie Mae and Freddie Mac announced a set of new policies pertaining to mortgage buybacks.
In announcements sent Wednesday to lenders, Fannie Mae and Freddie Mac each announced the release of updates to each company’s repurchase practices and procedures.
The new rules, which take effect on Jan. 1, 2016, establish a list of potential alternatives to repurchase that either of the government-sponsored enterprises could offer to lenders in the event of underwriting defects.
Additionally, Fannie Mae and Freddie Mac are providing specific guidance on what kinds of loan defects could lead to a repurchase request or an alternative remedy.
According to Donna Corley, Senior Vice President – Division Chief Risk Office of the Single Family Division at Freddie Mac, the uniform framework for representations and warranties remedies is being release at the direction of the Federal Housing Finance Agency.
“The new framework reflects Freddie Mac's long-standing commitment to partner with lenders to improve loan manufacturing, a goal we share with all of our customers,” Corley said.
“The framework announced today will not affect our customers' operations or our full file quality control reviews for performing and non-performing loans,” Corley added.
“The enhanced framework is intended to provide more clarity and transparency to lenders who do business with Freddie Mac on identifying and correcting origination defects, and the remedies that are available to them,” Corley said. “Today's announcement also underscores Freddie Mac's commitment to work with the Federal Housing Finance Agency and other stakeholders to continually improve America's mortgage finance system."
According to the announcements, beginning next year, Fannie Mae and Freddie Mac will begin categorizing loan defects into one of three categories: Findings; Price-Adjusted Loans; and Significant Defects.
Under the new policies, mortgages with defects categorized as “Findings” will not require a “correction” or a “remedy” from the seller.
According to the announcements, a correction is defined as an action taken by the seller/servicer, typically through delivery of documentation or information to either Freddie Mac or Fannie Mae, that demonstrates that the identified significant defect did not exist at the time of mortgage purchase, or has been corrected in the time frame and manner specified in the purchase documents such that the defect is no longer considered by Freddie or Fannie to be a significant defect.
A remedy is defined as an action to resolve a significant defect elected by Fannie or Freddie pursuant to the purchase documents in effect at the time of mortgage purchase.
Loans categorized as “Price-Adjusted Loans” require the Seller to pay the applicable post-settlement delivery fee that should have been paid to Freddie or Fannie when the mortgage was delivered.
And if a mortgage has one or more defects categorized as a “Significant Defect,” Freddie or Fannie will require the repurchase of the mortgage, but may offer the seller/servicer a repurchase alternative.
The announcements list several repurchase alternatives for both performing and non-performing loans.
For performing loans, the repurchase alternatives include:
- Recourse/repurchase agreement
- Indemnification agreement
- Mortgage insurance stand-in agreement
- Collateralized indemnification agreements (collateral in lieu of repurchase or collateralized recourse)
For non-performing loans, the repurchase alternatives include:
- Make-whole payment
- Split loss
- Loss reimbursement
“Lenders consistently tell us that concerns about repurchases limit their willingness to lend, so we’re trying to put those concerns to rest,” said Andrew Bon Salle, Executive Vice President, Single-Family Business at Fannie Mae.
“By pursuing repurchase alternatives and providing clarity on significant defects we aim to help lenders serve the market confidently, efficiently and profitably,” Bon Salle said. “Today’s guidance is another milestone in our efforts to provide more clarity and certainty to our customers.”
The full announcement from Fannie Mae is available here.
The full announcement from Freddie Mac is available here.