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Watt Focuses on Reps/Warrants; 97% GSE Loan Mentioned Only in Passing

by devteam October 21st, 2014 | Share

FederalrnHousing Finance Agency (FHFA) Director Melvin L. Watt focused his remarks tornattendees at the Mortgage Bankers Association annual conference on the issue ofrnrepresentation and warranties.  He acknowledgedrnthat fears of being forced to repurchase large numbers of loans after they havernbeen sold to one of the two government sponsored enterprises (GSEs) Fannie Maernand Freddie Mac has created unease among lenders almost from the start of thernmortgage crisis.</p

Wattrnsaid that the Representation and Warranty Framework in use by the GSE’srnprovides them the necessary assurances they need to purchase loans in an efficientrnand responsible manner without checking each loan individually or attending every closing. They also providernthe Enterprises remedies to address situations where a lender’srnobligations to meet the Enterprises’ purchase guidelines have not been fully met.  </p

But he also acknowledged that the Framework did not provide enough clarity to enable lendersrnto understand when Fannie Mae or FreddiernMac would exercise theirrnremedy to require repurchase of a loan.  This has contributed to lenders imposing credit overlays that drive up the cost of lendingrnand also restrict lending to borrowers with less than perfect creditrnscores or with less conventional financial situations.</p

Hernsaid that these concerns have led FHFA and the GSEs to place increasedrnattention and resources on upfront quality control reviews and to revise the Framework to ensure that it provides clearrnrules of the road that allow lenders to manage theirrnrisk and lend throughout the GSEs’ credit box. </p

Significantrnimprovements have already been made to the Framework; the first whichrnwent into effect in January 2013.  It sunsetsrnrepresentation and warranties obligations related to the underwriting of the borrower,rnthe property or the projectrnfor loans after a 36-month history of clean payments.  Last May there were additional refinements aroundrnthis 36-month benchmark which included allowing up torntwo 30-day delinquencies during the 36 months after acquisition; notifying thernlender when loans meet that performance benchmark or pass a quality review, andrneliminating automatic repurchase demand when primary mortgage insurance isrncanceled.</p

Wattrnsaid that there is an ongoing process to address the issue of life-of-loanrnexclusions which allow the GSEs to require lenders to repurchase loans throughoutrntheir lifetime because of instances of fraud or other significant noncompliance.rnThe current life-of-loan exclusions, he said, are open-ended and make it difficult for a lenderrnto predict when or if Fannie Mae or Freddie Mac will apply one of them.  The GSEs and FHFA have now reached anrnagreement in principle on how to clarify and define these exclusions to facilitaternmarket liquidity without compromising the safety and soundness of the GSEs.</p

Life-of-loan exclusions will be more firmly defined so lenders will know what they are and when they apply to loans that have otherwise obtained repurchase relief. These exclusions fall into six categories: 1) misrepresentations, misstatements and omissions; 2) data inaccuracies; 3) charter compliance issues; 4) first-lien priorityrnand title matters; 5) legal compliance violations; and 6) unacceptable mortgage products.  Second, wherernloans have alreadyrnearned repurchase relief,rnnew rules will make clear that only life-of-loan exclusions can triggerrna repurchase, hopefully endingrnconfusion on this issue.</p

The GSEs swill provide details on the updatedrndefinitions soon, but Watt highlighted some aspects of the refined definitions of misrepresentations and data inaccuracies.   First, there will be a minimum number ofrnloans that must be identified with misrepresentations or data inaccuracies torntrigger the exclusion.  This will allowrnthe GSE’s to act if a pattern emerges but not to revoke relief already granted becausernof problems with a single loan.  Also a “significance” requirement is being added which will require the GSEs torndetermine that the loan would have been ineligible for purchase initially if the loan information had been accurately reported.</p

Wattrnsaid there still remainsrnmore work to be done on the Framework and FHFA is already focused on developing an independent dispute resolution process and identifying cure mechanisms and alternative remediesrnfor lower-severity loan defects. FHFA also continues to make progress on issues concerning servicing representations and warranties, and hasrnreached an agreementrnin principle on modifyingrncompensatory fees and foreclosure timelines.</p

Somernanalysts had expected that Watt might announce that the GSEs would startrnpurchasing mortgages with loan-to-value ratios between 95 and 97 percent.  He did not go that far but did say that FHFArnis working with the GSEs to develop sensible and responsible guidelines forrnmortgages with 3 percent downpayments. He said he believed that the GSEs willrnbe able “to responsibly serve a targetedrnsegment of creditworthy borrowers with lower-down payment mortgages by taking into accountrn”compensating factors.” While this is a much more narrow effort than our work on the Representation and WarrantyrnFramework, it is yet anotherrnmuch needed piece to the broader accessrnto credit puzzle.”  Further details, he said, would be availablernabout this new guidelines in coming weeks. rn</p

Developmentrnof the Common Securitization Platform (CSP) is progressing, Watt said.  The governance structure and operatingrnagreement have been revised and the Board is close to being able to announcernthe selection of a Chief Executive Officer to run the CSP’s governing entity CommonrnSecuritization Solutions (CSS).  Each GSErnhas designated staff to work at the CSS location and during the year this teamrnhas been developing the platform.  FHFArnand the GSEs are also working on a single security to reduce tradingrndisparities between Fannie Mae and Freddie Mac.</p

In addition to these issues and proposals, Watt said FHFA continues to work on other priorities as well.  Tight credit remains a problem and manyrnindividuals and families are still facing the possible of foreclosure.  FHFA is evaluating ways to refine and improvernloss mitigation and foreclosure prevention policies at the GSEs and seeking waysrnto extend access to credit.</p

FinallyrnWatt also announced that FHFA has extended the comment period for a Proposed Rule dealing with the membership requirements of the Federal Home Loan Banks for another 60 days to January 12,rn2015. 

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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