GSEs Cut Lenders a Big, Retroactive Break on Reps and Warrants

News

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. 

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