FHFA Seeks to Clarify Repurchase Exposure with New Rules for Reps and Warranties

The Federal Housing Finance Agencyrn(FHFA) has moved to lift a lot of the uncertainty about lender risk andrnresponsibility with a new framework for representation and warranties on loansrnsold after the first of next year.  Thernguidance was released this morning and applies to conventional loans sold orrndelivered to Fannie Mae and Freddie Mac (the GSEs) after January 1, 2013.  </p

FHFA said, “The objective of the newrnframework is to clarify lenders’ repurchase exposure and liability and movesrnthe focus of quality control reviews from the time a loan defaults to the timernthe loan is delivered to the GSEs.  Loansrnwritten prior to January 1, 2013 are not included in the new rules nor arernmodified loans including modifications to HARP. rnUnder the new framework: </p<ul class="unIndentedList"<liLendersrnwill be relieved of certain repurchase obligations when loans meet specificrnpayment requirements. For example,rnrelief from reps and warranties will be provided for loans with 36 months ofrnconsecutive on-time payments.</li<liHomernAffordable Refinance Program (HARP) loans will be eligible for relief after anrnacceptable 12-month payment history beginning at the point the GSEs acquire thernloan.</li<liThernGSEs will make detailed information about exclusions from relief such asrnviolations of prevailing laws available to lenders and will continue to make arnrange of tools available to help improve loan quality.</li</ul

A review conducted by FHFA found thatrnprevious loan repurchase requests were based on substantive underwriting andrndocumentation deficiencies which led to substantial losses for the GSEs andrnthus for taxpayers.  These problems arosernprimarily from loans originated prior to 2008 when the GSEs were taken intorngovernment conservatorship.   Based onrnthis review FHFA is directing the GSEs to:</p<ul class="unIndentedList"<liConductrnquality control reviews earlier in the loan process, generally between 30 andrn120 days after loan purchase.</li<liEstablishrnconsistent timelines for lenders to submit requested loan files for review.</li<liEvaluaternloan files on a more comprehensive basis, focusing on identifying significantrndeficiencies.</li<liLeveragerndata from the tools currently used by the GSEs to enable earlier detection ofrnpotentially defective loans.</li<liMakernthe process for appealing repurchase requests more transparent for lenders. </li</ul

FHFA stressed that the new guidancernapplies to all single family mortgage loans that meet the specified eligibilityrnrequirements including Refi Plus/DU Refi Plus, Relief Refinance for SamernServicers, and Open Access.  The 12-monthrnpayment relief will apply to these loans.</p

FHFA said it is working closely with thernGSEs to make additional changes that will provide more efficient standards forrnthe servicing of GSE-eligible mortgages with a goal to working towards a commonrnset of servicing performance metrics and break remedies for performing loans,rninvestor reporting, and management of non-performing loans.</p

Edward J. DeMarco, Acting Director ofrnFHFA said “Ultimately. Better quality loan originations and underwriting, alongrnwith consistent quality control, help maintain liquidity in the mortgage marketrnwhile protecting Fannie Mae and Freddie Mac from loans not underwritten to prescribedrnstandards.  These efforts contribute to arnfirm foundation for a new sustainable housing finance system for the future.”

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