Fannie Mae Issues Additional Information on Quality Control
by: Anna DeSimone
On October 19, 2012 Fannie Mae issued Lender Letter LL-2012-07, Fannie Mae’s Quality Control Process – Additional Information, along with Selling Guide Announcement SEL-2012-08, New Lender Selling Representations and Warranties Framework. The announcements state that, at the direction of the Federal Housing Finance Agency (FHFA) and jointly with Freddie Mac, the Enterprise is implementing a new selling representations and warranties framework that would apply to mortgages purchased or securitized on or after January 1, 2013. The bulletins expanded on the Selling Guide Announcement SEL-2012 September 11, 2012. Please refer to my article published on that date:
http://bankersadvisory.blogspot.com/2012/09/fannie-mae-announces-new-lender.html
Under the new representations and warranties framework, for mortgages that establish an acceptable payment history and satisfy other eligibility criteria, Fannie Mae will not exercise its remedies in connection with a lender’s breach of certain selling representations and warranties generally relating to the underwriting of the borrower, the mortgaged premises, and the project in which the mortgaged premises is located.
Retraction of Automatic Repurchase Trigger
On 9/11/12, Fannie Mae announced a new policy regarding an automatic repurchase request for any mortgage loan for which no full monthly payment was made for the first three months after acquisition. Upon further review, the Enterprise determined that the automatic repurchase trigger will not be implemented. Fannie Mae will continue its current practice of conducting quality control reviews of mortgages that exhibit early payment defaults.
Overview of Quality Control Principles
In connection with the new representations and warranties framework, Fannie Mae will continue efforts to confirm the mortgages purchased by Fannie Mae comply with the Selling Guide and Lender Contract. Fannie Mae’s quality control efforts will be focused on identifying loans that are not originated in accordance with applicable underwriting and eligibility requirements.
Random and Discretionary Sampling
Under its core performing loan sample process and strategy, Fannie Mae will select a random sample of new mortgage deliveries that ensures statistical validity across the entire book of business. The random sample is augmented with discretionary samples that focus on detecting defects that may indicate loans that were ineligible for delivery to Fannie Mae because they failed to meet Fannie Mae’s underwriting and eligibility requirements.
Random and Discretionary Sample Sizes
Fannie Mae does not anticipate making any material changes to its random sample size or process in the near future. However, with respect to the discretionary samples, as Fannie Mae avails itself of the new technology and data-gathering tools to analyze loan-level data, it is expected that the discretionary samples for performing mortgages acquired under the new representations and warranties framework will increase in the aggregate across all loans and all lenders. This increase will likely occur in early 2013 but will fluctuate based on the lender’s loan origination quality.
File Request Timelines for Performing Loan Reviews
With respect to performing loan reviews, the random sample is generally selected from mortgages acquired by Fannie Mae during the prior 60 days. The discretionary sample will generally be selected within 150 days after mortgage acquisition. Fannie Mae’s goal is to complete performing loan file reviews and provide lenders with notice of any deficiencies within 90 days of receipt of the requested information and mortgage file. This will result in lenders receiving notices of any deficiencies closer to the acquisition date.
Enforcement Practices – Repurchase and Appeal Process
When Fannie Mae identifies a defective mortgage, it issues a repurchase request which describes the defects that render the mortgage ineligible for purchase by Fannie Mae. The defects that would give rise to a repurchase request consist of errors or failures that would have resulted in Fannie Mae’s refusal to purchase the mortgage at the time of delivery had they been known.
Fannie Mae will continue to maintain a process for lenders to appeal repurchase requests. The appeals process is very effective for loans with defects such as missing documentation or other curable deficiencies. A substantial proportion of the repurchase requests issued are resolved and the repurchase request is rescinded because the lender provides documentation or otherwise cures the defect identified in the repurchase request within the time period specified by Fannie Mae (when a cure has been offered to the lender).
Under the appeals process, when Fannie Mae issues a repurchase request for a particular mortgage loan, the lender is entitled to review and respond to the loan-level findings within 60 days and to provide any required documentation to address the deficiencies identified in the repurchase request, with the goal of resolving significant deficiencies. The goal of Fannie Mae and the lender should be to resolve repurchase requests as expeditiously as possible during the first appeal. However, if Fannie Mae does not approve the initial appeal and the lender discovers new information to support its contention that the mortgage complies with the Selling Guide and Lender Contract, a second appeal will be permitted within 15 days, provided the lender submits documentation concerning the new information with its appeal.
Alternatives to Repurchase
In certain circumstances, Fannie Mae may provide the lender with an alternative to the immediate repurchase of the identified mortgage. In each such case, Fannie Mae will notify the lender of the type and terms of the repurchase alternative.
Replacement of Informational Findings Letters
Repurchase alternatives will replace the practice of providing informational findings letters to lenders. With the notification of repurchase alternatives, Fannie Mae will be providing all lenders with information on quality control results as well as greater flexibility in repurchase alternatives.
Ongoing Communications
Fannie Mae provides lenders with ongoing feedback about their overall quality control performance, including identifying repurchases by defect types and reporting frequent or common defects. This information is provided through a variety of methods that range from regular electronic transmissions to more formal periodic discussions. Fannie Mae’s goal is to continue engaging in frequent, meaningful exchanges of information with its lenders on quality trend analyses and significant underwriting deficiencies identified through the quality control review process.
Misstatements, Misrepresentations, Omissions, and Data InaccuraciesAnnouncement SEL-2012-08 describes a number of representations and warranties for which the lender remains responsible for the life of the loan. The following information is intended to clarify the policies pertaining to misstatements, misrepresentations, omissions, and data inaccuracies that apply after a loan has established an acceptable payment history and qualified for the enforcement relief. If the lender or Fannie Mae discovers that one party to the transaction has misstated, misrepresented, or omitted information used to originate that loan, the loan is still eligible for relief if it otherwise satisfied the representations and warranties relief eligibility requirements. Mortgage loans that have a misstatement, misrepresentation, or omission that involve two or more parties to the transaction and two or more mortgage loans are ineligible for relief.
Data Inaccuracies
The policy in the Announcement pertaining to data inaccuracies addresses operational or other risks that a lender fails to deliver accurate data to Fannie Mae. Fannie Mae’s focus will be on identifying delivery data that differs from the information documented in the lender’s loan files on multiple loans that resulted from the lender’s failure to properly implement, monitor, or maintain its data capture and delivery process or system. If the information in the loan files indicates the loans were not eligible for sale to Fannie Mae on the terms delivered, lenders may be required to repurchase the loans, or Fannie Mae may impose an alternative repurchase remedy.
This concludes the 3-part series, Agency Quality Control regarding Announcements published on October 19, 2012. Please refer to the previous two articles for further reading:
Freddie Mac Issues New Quality Control Framework http://bankersadvisory.blogspot.com/search?updated-min=2012-01-01T00:00:00-05:00&updated-max=2013-01-01T00:00:00-05:00&max-results=39
FHFA, Fannie Mae & Freddie Mac Launch New Rep & Warranty Framework
http://bankersadvisory.blogspot.com/2012/10/fhfa-fannie-mae-and-freddie-mac-launch.html
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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