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

Fannie Maernand Freddie Mac have nailed down the promised details the life-of-loanrnexclusions related to their representation and warranty framework.  Under the direction of the Federal HousingrnFinance Agency (FHFA) the two government sponsored enterprises (GSEs) announcedrnthe changes on Thursday afternoon.  </p

Pressrnreleases from the two mortgage companies said the enhancements to the frameworkrnare expected to help reduce lender concerns about when a GSE may demand a loanrnbe repurchased.  While the frameworkrnprovided relief as explained below there remained so-called “life of loan”rnexclusions which permitted the GSEs to involve repurchase requests as long asrnthere was an unpaid balance on the loan. rn </p

Freddie Macrnsaid that concerns over these exclusions have caused some lenders to imposerncredit overlays, that is underwriting guidelines such as higher credit scores,rnmore stringent that those required by the GSEs themselves.  These overlays may have limited access tornmortgages to a number of creditworthy borrowers.  </p

Under therncurrent framework, the bulk of which applies to loans purchased on or afterrnJanuary 1, 2013, lenders are granted relief from the responsibility ofrnrepurchasing a loan under their representations and warranties obligations ifrnthe borrower makes 36 months of timely payments on loans (12 months of timelyrnpayments on HARP or Refi Plus^TM loans) or the loan successfully passes a fullrnquality control review by the respective GSE purchaser.</p

The changesrnannounced on Thursday provide specific requirements under which a repurchasernrequest could be made even if a loan had earned relief by satisfying the abovernrequirements.  These include a “significancerntest” related to misrepresentation or data inaccuracies.  This test is intended to clarify that the GSErnwould not have purchased the loan had it known about the inaccurate informationrnup front. </p

Thernrevision also changes the representation and warranty regarding legalrncompliance.  The GSE can only seekrnrepurchase of a loan either before or after it is granted relief under thernframework if the GSE determines that the noncompliance would impair its rightsrnunder the note or mortgage, result in direct liability to the GSE or that thernlender may have violated applicable federal state and local laws or violatedrnother regulations.  The GSEs could enforce arnremedy including repurchase for violations across that broad definition ofrnregulations so this section has been amended to specify those applicablernregulations.  They include foreign assetsrncontrol regulations, the Fair Housing Act, anti-discrimination provisions ofrnthe Equal Credit Opportunity Act, the Securities Exchange Act of 1934, and actsrnconsidered unfair, deceptive, or abusive under federal and state laws.  </p

Changes to the framework are effective retroactively</bto mortgages with settlement dates on or after January 1, 2013 except for anyrnloans for which repurchase requests have already been issued.  Changes to the compliance section of thernframework are effective for loans purchased on or after November 20, 2014.    </p