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More Details Emerge on New Reps & Warranties Framework

More details have been provided on upcoming updates to repurchase policies recently announced by Fannie Mae.

In September, the secondary lender released Lender Letter LL-2012-05 and Selling Guide Announcement SEL-2012-08 outlining a new representation and warranty framework.

Both Fannie and its government-controlled rival, Freddie Mac, made the changes as part of a broader series of strategic initiatives dubbed “seller-servicer contract harmonization” intended to clarify lenders’ repurchase exposure and liability on future deliveries — easing lender uncertainty, improving loan quality and increasing access to credit for homeowners.

The new policies go into effect on Jan. 1, 2013.

On Friday, Fannie issued Selling Guide Lender Letter LL-2012-07 explaining quality control requirements and clarifying related issues, as required by the Federal Housing Finance Agency.

While the random sample size of a seller’s originations reviewed by Fannie won’t change, discretionary samples that focus on detecting defects to determine if loans were ineligible for delivery because they failed to meet Fannie’s underwriting and eligibility requirements under the new framework will rise. The increase will likely occur early next year depending on a given lender’s origination quality.

Random samples will be performed on loans acquired by Fannie during the prior 60 days, and discretionary samples will be performed on loans acquired within the past 150 days.

If Fannie discovers new information after the initial review, it might review that information. But it doesn’t intend to re-review the eligibility or underwriting of loans that were previously reviewed.

When a repurchase appeal is denied, the lender will still have 15 days to present new information in a second appeal. This policy is already in effect.

Fannie described several alternatives to repurchase that go into effect next year. These include an agreement for the lender to provide recourse over the life of the loan or another specified time period; recourse where the lender’s obligation is secured by a specified collateral account; an agreement for the lender to indemnify, defend and hold Fannie harmless from any losses, costs, claims, actions, damages, liabilities, judgments, counterclaims or defenses; indemnification where the lender’s obligation is secured by a specified collateral account; a loss-sharing agreement; loss reimbursement; and an assessment by Fannie and payment by the lender of a guaranty fee adjustment or additional loan-level price adjustment with respect to the mortgage.

In determining repurchase alternatives, Fannie considers the type of loan defect involved; if the loan was misidentified and delivered without a fee; and the financial viability of the lender. Fannie might also consider compensating factors tied to loan origination, risk layering, whether the loan is performing; potential losses; and the lender’s past repurchase practices.

The letter also indicated that an automatic trigger for repurchase on loans where none of the first three payments were made as outlined in the earlier announcement will not be implemented.

Fannie clarified that lenders will remain responsible for repurchases during the life of the loan if a misstatement, misrepresentation or omission involves two or more parties to the transaction and two or more mortgage loans are ineligible for relief. But when only one loan is involved, then lenders are not liable for repurchase after the required number of payments have been made on-time.

Lenders cannot avoid repurchase liability if inaccurate data is initially submitted that would have otherwise made the loan ineligible for purchase.

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