Freddie Mac Updates Selling Representation and Warranty Framework
by: Anna DeSimone
May 12, 2014, Freddie Mac, jointly with Fannie Mae and at the direction of the Federal Housing Finance Agency, announced in Single Family Seller/Service Bulletin 2014-8 that it is making a number of significant enhancements to the selling representation and warranty framework introduced in 2012.
These changes, including revisions related to how a Mortgage becomes eligible for relief from certain specified selling representations and warranties as described in Single-Family Seller/Servicer Guide (“Guide“) Section 6.14(a), Representations and Warranties, include:
Relaxing the acceptable payment history requirement for determining when a Mortgage is eligible for relief from the selling representations and warranties
Introducing an additional path for eligible Mortgages to obtain relief from the selling representations and warranties. In addition to the payment history path, Sellers will also obtain relief from the selling representations and warranties if there is a satisfactory conclusion of a Freddie Mac quality control review of the Mortgage.
Providing Sellers with written notice of Mortgages that have met the eligibility requirements for relief from the selling representations and warranties
Implementing an alternative to repurchase that may allow a Seller to “stand-in” in lieu of repurchasing the Mortgage. Freddie Mac will not automatically require repurchase when notified that primary mortgage insurance has been rescinded on a Mortgage.
The selling representation and warranty framework that was announced in Guide Bulletin 2012-18 is referred to as Version 1 of the framework. The selling representation and warranty framework announced in Bulletin 2012-18 as modified by the changes described in this Bulletin is referred to as Version 2 of the framework.
Effective Dates
Version 1 of the framework is effective for Mortgages with Freddie Mac Settlement Dates on and after January 1, 2013 and before July 1, 2014. Version 2 of the framework, as announced in this Bulletin, is effective for Mortgages with Freddie Mac Settlement Dates on and after July 1, 2014.
Requirements Under Version 2 Of The Framework
Under Version 2 of the framework, there are two separate, independent paths through which a Seller/Servicer may obtain relief from the selling representations and warranties. Relief will either be based on:
• The Borrower’s acceptable payment history, or
• A satisfactory conclusion of a Freddie Mac quality control review
Relief based on acceptable payment history
Under Version 2 of the framework, Freddie Mac is relaxing its requirements for relief based on an acceptable payment history so that Mortgages that would previously have obtained relief upon the Borrower’s 60th monthly payment will now receive relief upon the Borrower’s 36th monthly payment.
If the relief is based on the Borrower’s acceptable payment history, the relief will occur either:
• For Mortgages other than Freddie Mac Relief Refinance Mortgages (“Non-Relief Refinance Mortgage”), upon payment by the Borrower of the first 36 monthly payments due following the Freddie Mac Settlement Date, provided that the Borrower:
o Had no more than two 30-day Delinquencies
o Had no 60-day or greater Delinquencies, and
o Is not 30 or more days delinquent with respect to the 36th monthly payment, or
• For a Relief Refinance Mortgage, the earlier of:
o Upon payment by the Borrower of the first 12 monthly payments due following the Freddie Mac Settlement Date, provided the Borrower had no 30-day or greater Delinquencies, or
o Upon payment by the Borrower of the first 36 monthly payments due following the Freddie Mac Settlement Date, provided the Borrower:
Had no more than two 30-day Delinquencies and no 60-day or greater Delinquencies, and
Is not 30 or more days delinquent with respect to the 36th monthly payment
Note: Freddie Mac are clarifying that the acceptable payment history begins on the date of the first monthly payment due from the Borrower after the Freddie Mac Settlement Date. This clarification applies to Version 1 and Version 2 of the framework.
Relief based on a Freddie Mac quality control review
Under Version 2 of the framework, Freddie Mac is adding an additional path through which Mortgages may qualify for relief of the selling representations and warranties: a satisfactory conclusion of a quality control review. These requirements for obtaining relief apply both to performing loans and non-performing loans. Relief will be obtained under the quality control review path regardless of whether the Mortgage met the acceptable payment history criteria. Quality control reviews will be conducted in accordance with Freddie Mac current quality control review practices as described in Freddie Mac October 19, 2012 Industry Letter.
Each of the situations described in the bullets below is considered to be a satisfactory conclusion of a quality control review. If the relief is based on a Freddie Mac quality control review, the relief will occur when one of the following takes place:
• Freddie Mac completes the quality control review of the loan file, which includes a review of the credit underwriting and eligibility of the Borrower, the Mortgaged Premises (including its value), and the project in which the Mortgaged Premises is located, if applicable (“the quality control review”), and determines that the Mortgage is acceptable (that is, it is not subject to a repurchase request)
• Freddie Mac completes the quality control review and determines the Mortgage is not acceptable because of a loan deficiency that is curable, and the Seller/Servicer cures the deficiency to Freddie Mac’s satisfaction. This process is more fully described in the October 19, 2012 Industry Letter and will be further clarified with future communications as needed. Relief will be effective upon the correction of the loan deficiency. For example, if the Mortgage file delivered to Freddie Mac did not contain the required verification of income, the loan deficiency would be deemed to be corrected if the Seller/Servicer provided the missing documentation within the time frame specified. Another example of an action taken to correct a loan deficiency is rectifying a prior lien by producing evidence of a recorded satisfaction or release of such prior lien within the time frame specified.
• Freddie Mac completes the quality control review and determines the Mortgage is not acceptable, but may be eligible for a repurchase alternative that expires or terminates by its terms. In this case, relief will be provided on the date of expiration or termination of the repurchase alternative. For example, if Freddie Mac determined a Mortgage was not acceptable and, as a repurchase alternative, Freddie Mac and the Seller/Servicer agreed that the Mortgage would be subject to recourse for five years, then the Seller/Servicer would be relieved of the selling representations and warranties at the end of the five-year period. Other possible repurchase alternatives include indemnification, make-whole arrangements, and certain split-loss agreements; in each case, the repurchase alternative must satisfactorily expire or terminate by its terms in order for the affected Mortgage to be eligible for relief from the selling representations and warranties under Version 2 of the framework.
Quality Control Processes Supporting the Framework
With the implementation of Version 2 of the framework, Freddie Mac’s quality control review process becomes an integral part of the relief framework. Freddie Mac quality control review practices and processes not only help ascertain the quality of Mortgages sold to Freddie Mac, they also aid in determining whether the Mortgages sold to Freddie Mac are eligible for relief from selling representations and warranties.
In the October 19, 2012 Industry Letter, Freddie Mac provided a detailed description of its quality control review principles, sample processes, file request and review time lines, review practices and enforcement practices and time lines. Those policies and practices remain generally unchanged and in effect for Version 2 of the framework. However, the sections titled “Subsequent Mortgage file review process” and “Repurchase and appeal process” do not anticipate that a satisfactory conclusion of a quality control review will provide a Mortgage with relief from the selling representations and warranties. As those paragraphs relate to Version 2 of the framework, they are amended by the provisions of this Bulletin describing the satisfactory conclusion of quality control review.
About the Author:
Anna DeSimone is President and Founder of Bankers Advisory, Inc. She can be reached at anna@bankersadvisory.com
Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.
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