Fannie Mae and Freddie Mac said the government-sponsored enterprises won't require lenders to automatically repurchase loans with early payment defaults, reversing course on a key provision in the government-sponsored enterprise's new representation and warranty framework.
Early payment defaults occur when a borrower misses a payment during the first three months of the loan.
The GSEs had previously said that under their new guidelines, early payment defaults would automatically trigger a repurchase request from the agencies — no matter how well documented the loan was. In letters released to lenders Friday, both Fannie Mae and Freddie Mac said that "upon further review, it has determined that the automatic repurchase trigger will not be implemented."
The new representation and warranty guidelines, announced by the Federal Housing Finance Agency in September, are scheduled to go into effect for loans originated on or after Jan. 1, 2013.
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. The changes being pushed through for 2013 are positioned as an effort to relieve at least some of that pressure for lenders, although some have questioned whether the changes will help or hurt the mortgage market.
So-called buyback risk has been routinely cited by lenders as a key reason certain loans aren't being made, at numerous industry conferences during 2012. This risk has already materialized in the form of reducing bank earnings, with Fifth Third Bancorp (FITB) reporting earlier this week that the bank's third-quarter earnings were affected by a reserve holding against future rep and warranty claims.
Both letters issued by the GSEs also spelled out for the first time key repurchase alternatives either Fannie or Freddie may choose to offer lenders, incuding indemnification and loss sharing, among other alternatives.
The GSEs also warned lenders to expect more loan reviews, saying its sampling of performing loans for rep and warranty review "will likely increase in aggregate across all loans and lenders," as both mortgage giants expand their discretionary review process on loans they guarantee.
Editor's note: An earlier version of this story referred only to Fannie Mae. Both GSEs issued the updated rep and warrant guidance simultaneously, and the story has been corrected to reflect this.