At the direction of the Federal Housing Finance Agency (FHFA), both Fannie Mae and Freddie Mac announced on Thursday updates to their life-of-loan representation and warranty framework in order to provide clarity for lenders regarding the potential risk for repurchase.
The clarification of life-of-loan exclusions announced by the GSEs are meant to provide more certainty to lenders and borrowers alike, which will "increase access to credit without compromising safety and soundness," according to a prepared statement by FHFA Director Mel Watt.
"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 in his statement. "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."
For Fannie Mae, the new framework guidelines provide specific requirements under which lenders can seek a repurchase after they are granted relief. One particular clarification made in Thursday's updates relates to misrepresentations or data inaccuracies around the loan that surface post-relief date – Fannie Mae will seek repurchase on these loans only after is that Fannie Mae will seek repurchase of a loan after administering a "significance test" to determine if Fannie Mae would not have purchased the loan in the first place had the misrepresentations or inaccuracies been known prior to the relief date.
Currently, lenders are granted relief on many representations if one of three requirements is met: The borrower makes timely payments on most loans for 36 months, the borrower makes timely payments on Home Affordable Refinance Program (HARP) or Refi Plus loans for 12 months, or if the loan passes a quality control review administered by Fannie Mae.
Fannie Mae also announced it will seek repurchase on a loan either before or after relief is obtained under the framework if "it determines the failure to comply would impair its rights under the note or mortgage or result in direct liability by Fannie Mae under the law, or if the lender may have violated a consumer protection or other law or regulation that is specifically listed in today’s announcement."
"The clarity and certainty we’re providing today is crucial for lenders to increase access to mortgage credit," said Andrew Bon Salle, EVP of Single-Family Underwriting, Pricing, and Capital Markets for Fannie Mae. "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."
Freddie Mac announced that it will implement a similar significance test to the one Fannie Mae will administer in order protect the enterprise against fraud, misrepresentations, or data inaccuracies in regards to a loan. Freddie Mac also announced that the updates will be retroactive to mortgages that settled with the enterprise on or after January 1, 2013. In addition, Freddie Mac will be updating the "compliance with law" definition in its Selling Guide in order to "provide more certainty on how Freddie Mac will enforce remedies for compliance with laws," according to Thursday's announcement.
"Today's announcement goes a long way in providing clarity and certainty to lenders as to when a loan will be subject to a repurchase," said Dave Lowman, EVP of Single Family Business at Freddie Mac. "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."