Fannie Mae & Freddie Mac QC and Rep & Warranty Framework
by: Anna DeSimone
Now that mortgage lenders are delivering loans to Fannie Mae and Freddie Mac commencing with January 2013 originations, I am providing a recap of three articles I published last fall when the Federal Housing Finance Agency (FHFA) announced the new representation and warranty framework.
The FHFA ruling applies to conventional loans sold or delivered to Fannie Mae or Freddie Mac on or after January 1, 2013.
The new model moves the focus of quality control reviews from the time a loan defaults up to the time the loan is delivered to Fannie Mae or Freddie Mac. An FHFA review of past repurchase requests issued by Fannie Mae and Freddie Mac revealed that these requests were based on substantive underwriting and documentation deficiencies.
The new model requires Fannie Mae and Freddie Mac to:
- Conduct quality control reviews earlier in the loan process, generally between 30 to 120 days after loan purchase;
- Establish consistent timelines for lenders to submit requested loan files for review;
- Evaluate loan files on a more comprehensive basis to ensure a focus on identifying significant deficiencies;
- Leverage data from the tools currently used by Fannie Mae and Freddie Mac to enable earlier identification of potentially defective loans;
- Make available more transparent appeals processes for lenders to appeal repurchase requests.
Please refer to the article published on October 19, 2012: FHFA, Fannie Mae & Freddie Mac Launch Lender Framework
Fannie Mae Representations and Warranties Framework
For conventional loans that are acquired by Fannie Mae on a flow basis on or after January 1, 2013, lenders will be relieved of its obligation to remedy mortgage loans that are in breach of certain underwriting and eligibility representations and warranties if the borrower meets one of two payment history requirements and the other eligibility criteria described in the Guide as “Eligible Mortgage Loans.” No relief will be available for breaches of certain “life of loan” representations and warranties, regardless of the borrower’s payment history.
Fannie Mae QC Process
Integral to the new representation and warranty framework is the quality control review process and enforcement of violations. The Quality Control Lender Letter discusses the changes in Fannie Mae’s quality control process that lenders can expect as a result of the relief provided by the new framework. Fannie Mae will evaluate the mortgage loan file with the primary focus of confirming that the mortgage loan meets underwriting and eligibility requirements. A mortgage loan is ineligible if errors or failures are uncovered in the file that would have resulted in Fannie Mae’s refusal to purchase the mortgage loan on the terms delivered had the facts been known at the time of acquisition.
The quality and volume of the mortgage loans delivered to Fannie Mae will directly impact the size of the discretionary sample and lenders can expect an overall increase in the focus on reviewing performing loans. The loan files will continue to be reviewed by trained loan file review staff. The focus of a comprehensive file review will be to confirm whether the mortgage loan, as delivered, meets Fannie Mae’s underwriting and eligibility requirements. If errors or failures are uncovered in the file, the review determines whether Fannie Mae would have refused to purchase the mortgage loan on the terms delivered had the facts been known at the time of acquisition.
If Fannie Mae determines that a mortgage loan failed to meet underwriting requirements or is otherwise ineligible, Fannie Mae may issue a repurchase request or pursue another remedy. As noted above, the determination is based on whether Fannie Mae would have refused to purchase the mortgage loan on the terms delivered had the facts been known at the time of acquisition. Please refer to the article published on September 11, 2012: Fannie Mae Announces New Rep & Warranty Framework and QC Process
Freddie Mac Representations and Warranties Framework
October 19, 2012 Freddie Mac Announced Industry Letter, Quality Control and Enforcement Practice, along with Seller/Servicer Guide Bulletin 2012-22. The announcements expanded on the September 11, 2012 Industry Letter regarding quality control and enforcement requirements. The supplemental information pertains to repurchase timeframes, file requests, appeals, subsequent appeals and repurchase alternatives. The bulletin addresses the acceptable payment history and other eligibility criteria regarding repurchases under the new framework, effective for mortgages with settlement dates on and after January 1, 2013.
Freddie Mac QC Process
Under its core performing loan sample process and strategy, Freddie Mac selects both random and targeted samples of loans for quality control. The targeted sample consists of two categories: loan-level and lender-level. The enterprise anticipates that the non-performing loan sample process and review strategy will remain as currently communicated. However, as Freddie Mac consumes and analyzes more loan data, sellers can expect to see adjustments in the level of quality control files requested and reviewed by Freddie Mac for performing loans as early as April 2013.
The loan samples are reviewed by quality control underwriters who analyze loans on a comprehensive basis by evaluating the entirety of the loan file and the applicable purchase documents. The primary focus of the review is to identify significant underwriting deficiencies.
Freddie Mac’s comprehensive review includes consideration of the borrower’s ability to repay the loan and an in-depth analysis of the credit and capacity of the borrower, as well as the underlying collateral. Where certain characteristics are deemed deficient, when considered with other features, the loan may be considered acceptable.
If, in connection with a quality control review of a performing mortgage that is undertaken prior to the borrower meeting the payment history requirements of the new representation and warranty framework, it is concluded that the mortgage is not acceptable quality, Freddie Mac will communicate to the Seller/Servicer whether the mortgage will require action and/or will continue to be eligible for representation and warranty relief going forward.
Based on the quality control review, if Freddie Mac identifies a defective mortgage, it issues a repurchase letter, which describes the defects that render the mortgage ineligible for purchase by Freddie Mac. The defects that would give rise to a repurchase request consist of errors or failures that would have resulted in Freddie Mac’s refusal to purchase the loan at the time of delivery. Please refer to the article published on October 19, 2012: Freddie Mac Issues New Qualitay Control Framework
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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