A new plan to relieve lenders of repurchase risk when selling loans to Fannie Mae and Freddie Mac is a big step forward, but may not go far enough to ease financial firms' concerns, analysts with credit ratings agency DBRS said.
Additionally, DBRS believes the new plan, announced last month, is set up so that mortgage servicers need to gauge future repurchase risks. This is simply unreasonable, DBRS claims.
Earlier this month, the government housing agencies said they would roll out new reps and warrants requirements, providing relief on reps and warrants putback risk for loans that establish acceptable payment histories.
Under the reps and warrants clause of the mortgage contract, GSEs have the option to force a lender to buy back a loan that breaches certain representations made about the loan upfront.
But to help financial firms, the GSEs said all of the loans acquired by the GSEs after Jan. 1, 2013 only have to show that the loan had no 30-day or greater delinquencies during the first 36 months or it had no more than two 30-day delinquencies and no 60-day or greater delinquencies during the first 36 months to avoid buyback risk.
In addition, the loan has to be current at the 60th month following the GSE acquisition date.
DBRS analysts applaud that improvement, but say in a market where borrowers are constantly subject to life changes, it's difficult to see these factors as the gauge of repurchase risk.
"After the record number of repurchase requests that were initiated in recent years, many industry participants were happy to see the GSEs embrace the concept of 'sunset provisions' for some of their underwriting and eligibility reps and warrants," DBRS said.
"However, several were disappointed to see that the modified reps and warrants would only go into effect if the borrower had a relatively perfect payment history for three to five years," the note reads. "The sentiment being that it is unreasonable that the seller/servicer’s should have to gauge future repurchase requests around the unexpected life events of a borrower that may render them unable to pay their mortgage loan such as: the loss of a job, death of a bread winner or long term medical illness."