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GSEs Improve Repurchase Policies

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Changes to repurchase policies at Fannie Mae and Freddie Mac are expected to ease lender uncertainty, improve loan quality and increase access to credit for homeowners.

The two secondary lenders are launching a new representation and warranty framework, according to a notice Tuesday from the Federal Housing Finance Agency.

The revisions are part of a broader series of strategic initiatives dubbed “seller-servicer contract harmonization” and are intended to clarify lenders’ repurchase exposure and liability on future deliveries.

Earnings reports from the nation’s biggest residential lenders indicate that most of the repurchase demands being issued are from Fannie and Freddie on loans originated during the few years leading up to the housing collapse. Sellers have complained that the repurchase process has been inconsistent — leading Bank of America Corp. to stop doing business entirely with Fannie.

Acting FHFA Director Edward J. DeMarco acknowledged in a speech Monday at the American Mortgage Conference that repurchase liability has made lenders more skittish about extending credit.

FHFA said that the changes are expected to improve access to mortgage financing.

“We have listened to lenders and heard their concerns about the repurchase process,” the regulator stated.

After 36 months of consecutive on-time payments, lenders will be relieved of certain repurchase obligations. The three-year term is expected to enable Fannie and Freddie enough time to conduct sampling and analyses needed to confirm the eligibility of the mortgage loans acquired as well as determine the borrower’s ability to repay the loan.

On loans closed through the Home Affordable Refinance Program, Fannie’s Refi Plus/DU Refi Plus, or Freddie’s Relief Refinance, only 12 months of on-time payments will be required.

FHFA noted that information about exclusions to the relief like violations of laws and regulations are detailed in Lender Letter LL-2012-05 and Selling Guide Announcement SEL-2012-08 from Fannie and an industry letter and Bulletin No. 2012-18 from Freddie.

With the changes, the focus of quality control reviews will be moved from the point of default to sometime between 30 and 120 days after loan purchase — resulting in more reviews on performing loans. By moving up such reviews, losses at the pair of government-controlled enterprises are expected to be cut.

sketch of Edward J. DeMarco
sketch of Edward J. DeMarco
by Stephen McConnell

Another enhancement will be to make the repurchase appeals process more transparent.

But loan file evaluation will be more comprehensive, and the focus will be on identifying significant deficiencies.

“In adopting the new selling representation and warranty framework for future deliveries, it is important to note that we are not modifying the representations and warranties currently required,” the FHFA’s notice stated. “Sellers continue to be responsible for underwriting and delivering investment-quality mortgages according to the requirements of Fannie Mae’s selling guide and lender contract and Freddie Mac’s purchase documents.”

The new policy applies to loans that are sold or delivered beginning next year.

“Ultimately, better quality loan originations and underwriting, along with consistent quality control, help maintain liquidity in the mortgage market while protecting Fannie Mae and Freddie Mac from loans not underwritten to prescribed standards,” DeMarco said in the notice. “These efforts contribute to a firm foundation for a new, sustainable housing finance system for the future.”

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