Fannie Mae Updates Rep Framework Underwriting Eligibility and QC Performance
by: Anna DeSimone
June 24, 2014, Fannie Mae published Ann. SEL-2014-07: Selling Guide Updates. The Selling Guide has been updated to include changes to the following:
- HomePath® Properties
- Incorporate Announcement SEL-2014-05, Lender Selling Representations and Warranties Framework Updates
- Federal Home Loan Banks as Grant and Community Seconds® Providers
- 2014 Area Median Incomes
- Miscellaneous Selling Guide Update
Two of the updates are described below. Please refer to the 2014-07 Update for additional information.
A2-3.2-02, Enforcement Relief for Breaches of Certain Representations and Warranties Related to Underwriting and Eligibility (06/24/2014)
Introduction
This topic describes the framework that provides lenders with relief from Fannie Mae’s enforcement for breaches of certain underwriting and eligibility representations and warranties for certain mortgage loans acquired on or after January 1, 2013, that meet specific payment history and other eligibility requirements. This topic contains information on the following subjects:
- Overview of the Enforcement Relief Framework
- Scope of Enforcement Relief of Underwriting and Eligibility Representations and Warranties
- Eligible Mortgage Loans
- Additional Eligibility Criteria for Versions 1 and 2
- Notification of Relief
- Life of Loan Representation and Warranty Exclusions
- Comparison of Version 1 and Version 2 of the Framework
Overview of the Enforcement Relief Framework
Representations and warranties required by Fannie Mae are described in the Mortgage Selling and Servicing Contract, the Selling and Servicing Guides, and other Lender Contracts. Violation of any representation and warranty is a breach of the Lender Contract, entitling Fannie Mae to pursue certain remedies, including a loan repurchase request or make whole payment request as more fully described in A2-3.2-01, Loan Repurchases and Make Whole Payments Requested by Fannie Mae (06/24/2014). However, for conventional loans that are acquired by Fannie Mae on a flow basis on or after January 1, 2013, the lender will be relieved of its obligation to remedy mortgage loans that are in breach of certain underwriting and eligibility representations and warranties if the loan meets certain eligibility criteria described under Eligible Mortgage Loans below. This framework does not modify the representations and warranties the lender makes to Fannie Mae when selling mortgage loans. No relief will be available for breaches of certain “life of loan” representations and warranties as set forth in Life of Loan Representation and Warranty Exclusions below, regardless of whether a loan otherwise qualifies for relief. The availability of the enforcement relief framework does not discharge lenders from the responsibility for underwriting and delivering quality loans in accordance with Fannie Mae’s requirements.
Scope of Enforcement Relief of Underwriting and Eligibility Representations and Warranties
With respect to an eligible mortgage loan (as defined below), a lender will be relieved of the requirement to remedy a mortgage loan (such as repurchase, a make whole payment, or other repurchase alternative as more fully described in A2-3.2-03, Additional Policies Related to Mortgage Loan Repurchases (06/24/2014)) if that mortgage loan violates Fannie Mae’s single-family underwriting and eligibility requirements set forth in the applicable parts of the Selling Guide and other Lender Contracts relating to:
- Underwriting the borrower, which includes the lender’s assessment of the borrower’s loan terms, credit history, employment and income, assets, and other financial information used for qualifying the borrower for the loan;
- Underwriting the subject property, which includes the lender’s analysis of the description and valuation of the property to determine its adequacy as collateral for the mortgage transaction; and
- Underwriting the project in which the property is located, which includes the lender’s analysis of the condo, co-op, or pud project in accordance with Fannie Mae’s requirements.
The following subparts of the Selling Guide are covered by the relief:
- Subpart B1, Loan Application Package;
- Subpart B2, Eligibility;
- Subpart B3, Underwriting Borrowers;
- Subpart B4, Underwriting Property; and
- Subpart B5, Unique Eligibility and Underwriting Considerations.
Note: Fannie Mae may be subject to third-party claims, including, but not limited to, those made by or on behalf of borrowers or MBS investors. Notwithstanding the relief provided by the framework described herein, the lender’s indemnification obligations with respect to third-party claims continue in full force and effect. See A2-1-03, Indemnification for Losses (04/09/2013), for a description of the indemnification obligations which continue.
Eligible Mortgage Loans
To be eligible for the representation and warranty enforcement relief, a mortgage loan must meet the requirements described below. There are two versions of the framework, based on the acquisition date of the mortgage loan. Each version then has specific additional requirements, including:
Version 1
Version 1 based on acquisition date
Version 1 payment history requirements
Additional eligibility criteria
Version 2
Version 2 based on acquisition date
Version 2 payment history requirements or Version 2 QC review requirements
Additional eligibility criteria
Version 1 and Version 2 Acquisition Date Requirements
Version 1
Mortgage loans that were acquired by Fannie Mae as follows:
Whole loans purchased on or after January 1, 2013, but before July 1, 2014; or
Mortgage loans delivered into MBS with pool issue dates on or after January 1, 2013, but before July 1, 2014.
Version 2
Mortgage loans that were acquired by Fannie Mae as follows:
Whole loans purchased on or after July 1, 2014; or
Mortgage loans delivered into MBS with pool issue dates on or after July 1, 2014.
Version 1 Payment History Requirements
To be eligible for enforcement relief under Version 1 of the framework, the mortgage loan must meet one of the following payment history requirements:
- The borrower was not 30 days delinquent during the 36 months following the acquisition date, or for Fannie Mae Refi Plus™ and DU Refi Plus™ mortgage loans, the borrower was not 30 days delinquent during the 12 months following the acquisition date; or
- The borrower had no more than two 30-day delinquencies and no 60-day or greater delinquencies, during the 36 months following the acquisition date; and was current as of the 60th month following the acquisition date.
Version 2 Payment History Requirements
To be eligible for relief under Version 2 of the framework, for mortgage loans other than Fannie Mae Refi Plus and DU Refi Plus loans, if the relief is based on the borrower’s acceptable payment history, the relief will occur upon payment by the borrower of the first 36 monthly payments due following the mortgage loan acquisition date, provided that the borrower
- had no more than two 30-day delinquencies,
- had no 60-day or greater delinquencies, and
- is not 30 or more days delinquent with respect to the 36th monthly payment.
For Fannie Mae Refi Plus and DU Refi Plus mortgage loans, relief is based on the earlier of:
- payment by the borrower of the first 12 monthly payments due following the mortgage loan acquisition date, provided the borrower had no 30-day or greater delinquencies; or
- payment by the borrower of the first 36 monthly payments due following the mortgage loan acquisition date, provided the borrower
- had no more than two 30-day delinquencies,
- had no 60-day or greater delinquencies, and
- is not 30 or more days delinquent with respect to the 36th monthly payment.
Version 2 Fannie Mae Quality Control Review
Under Version 2 of the framework, there is an alternative path through which mortgages may qualify for relief of the selling representations and warranties based on the satisfactory conclusion of a quality control review. This relief will occur when one of the following takes place:
- Fannie Mae completes the quality control review of the loan file, which includes a review of the credit underwriting and eligibility of the borrower, the property (including its value), and the project in which the property is located, if applicable, and determines that the mortgage is acceptable (that is, it is not subject to a repurchase request).
- Fannie Mae completes the quality control loan file review and determines the mortgage is not acceptable because of a selling deficiency that the Selling or Servicing Guide specifically identifies may be cured and the lender cures such deficiency to Fannie Mae’s satisfaction in the time frame and manner specified in the Selling or Servicing Guide. In this case, relief will be effective upon the satisfactory cure of the deficiency.
For example, if the mortgage file delivered to Fannie Mae did not contain the required verification of income, the mortgage defect would deemed to be cured if the lender provided the missing documentation requested by Fannie Mae within the time frame specified. Another example of an action taken to correct a deficiency is rectifying a prior mortgage lien by producing evidence of a recorded satisfaction or release of such prior mortgage lien within the time frame specified.
3. Fannie Mae completes the quality control loan file review and determines the mortgage is not acceptable but may be eligible for a repurchase alternative which expires or terminates by its terms. In this case, relief will be effective upon the satisfactory expiration or termination of the alternative to repurchase.
For example, if Fannie Mae determined a mortgage was not acceptable and, as an alternative to repurchase, Fannie Mae and the lender agreed that the mortgage would be subject to credit enhancement for 5 years, the mortgage would be relieved of the selling representations and warranties at the end of the 5-year period. Other possible alternatives to repurchase include recourse, 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.
Note: The requirements for obtaining relief based on a QC review apply both to performing loans and non-performing loans. As a result, lenders may obtain relief through the quality control path regardless of whether the mortgage loan had an acceptable payment history.
Additional Eligibility Criteria for Versions 1 and 2
In addition to the acquisition date, payment history, and QC requirements described above, the following criteria must also be met for mortgage loans to qualify for relief:
- The mortgage loan must be a conventional mortgage loan sold to Fannie Mae on a flow basis.
- Government-guaranteed or -insured loans are not eligible for enforcement relief.
- Non-flow seasoned or bulk mortgages may be eligible for enforcement relief only on a negotiated basis. (Seasoned loans that are sold to Fannie Mae on a flow basis in accordance with the Selling Guide are eligible for enforcement relief.)
- The determination of whether the loan has an acceptable payment history begins on the date of the first monthly mortgage payment due after the Fannie Mae acquisition date.
- With the exception of mortgage loans with temporary buydowns, neither the lender nor a third party with a financial interest in the performance of the loan (such as a mortgage broker, correspondent lender, or mortgage insurer) can escrow or advance funds on behalf of the borrower to be used for payment of any principal or interest payable under the terms of the mortgage loan for the purpose of satisfying the payment history requirement.
- The mortgage loan cannot have been sold to Fannie Mae with any credit enhancement other than traditional primary mortgage insurance (i.e., lender- or borrower-paid mortgage insurance).
- Mortgage loans with credit enhancement other than traditional primary mortgage insurance may be eligible for enforcement relief only on a negotiated basis.
- Loans that become subject to a forbearance agreement, repayment plan, or otherwise modified from the original terms after acquisition by Fannie Mae are not eligible for relief based on the borrower’s payment history, but may be eligible on the basis of a quality control review of the loan file if the loan otherwise meets the Version 2 requirements.
- With the exception of certain loans purchased under the terms of a long-term standby purchase commitment (LTSC), the loans cannot have had any delinquencies between the origination date and the Fannie Mae acquisition date.
For loans classified as “Class 1 Mortgage Loans” or “Class 4 Mortgage Loans” that are purchased under an LTSC, the payment history requirement will be measured from the date the loan was committed under the LTSC structure (the 12-, 36-, or 60-month time frame will begin on the date the loan was committed into the LTSC).
The mortgage loan must not be subject to an outstanding request for repurchase, repurchase alternative, or make whole payment. (See A2-3.2-03, Additional Policies Related to Mortgage Loan Repurchases (06/24/2014), for additional information.)
Note: Unless otherwise agreed to by Fannie Mae and the lender, once a mortgage loan has qualified for the representation and warranty enforcement relief by compliance with the requirements above, eligibility for the enforcement relief is final and irrevocable subject to the life of loan representation and warranty exclusions.
Notification of Relief
Fannie Mae will provide lenders with reports listing those mortgage loans that met the eligibility requirements for relief.
Life of Loan Representation and Warranty Exclusions
A lender is not relieved from the enforcement of breaches of its representations and warranties on any mortgage loan, including eligible mortgage loans, with respect to the following matters even if those matters are addressed in Subparts B1 through B5 of the Selling Guide. With respect to each mortgage loan, a lender remains responsible for the life of loan representations and warranties related to the following, as more fully described in A2-2.1-06, Life of Loan Representations and Warranties (06/24/2014).
- Fannie Mae Charter Act Matters;
- Misstatements, Misrepresentations, and Omissions;
- Data Inaccuracies;
- Clear Title/First-Lien Enforceability;
- Compliance with Laws and Responsible Lending Practices; and
- Single-Family Mortgage Product Eligibility.
Refer to the update for additional information and Comparison Charts of Version 1 and Version 2 of the Framework.
D2-1-03, Fannie Mae QC Report of Findings and Lender Rebuttal (06/24/2014)
Introduction
This topic contains information on Fannie Mae’s findings and lender appeal process, including:
- Fannie Mae QC Report of Findings
- Repurchase Resolution
- Appeal of Fannie Mae QC Review Decisions
- Additional Information
Fannie Mae QC Report of Findings
Fannie Mae provides lenders with ongoing feedback about their overall QC performance. The feedback identifies defect types, reporting on frequent or common defects, and describes quality trend analyses and significant underwriting deficiencies identified through the QC loan file review process. This information is provided through a variety of methods that range from regular electronic transmissions to more formal periodic discussions.
The detailed loan-level reports that lenders receive identify:
- Defects(s) that caused a loan to be ineligible (that is, unacceptable and subject to a repurchase request);
- Defect(s) that, when considered with other loan attributes, did not impact the overall eligibility (or acceptability) of the loan and did not trigger a repurchase request (making it eligible for relief under version 2 of the representation and warranty framework, assuming no other significant eligibility defect was identified in the quality control loan file review); and
- No identified defects.
Fannie Mae’s quality control process provides lenders with a holistic view of loan quality by identifying ineligible loans as well as loans that had findings that do not affect the overall eligibility. Fannie Mae believes that providing this additional feedback supplies lenders with an important source of information that can lead to improving loan quality in the future.
Repurchase Resolution
When Fannie Mae identifies a defective mortgage, it may, in its sole discretion, impose a condition to retaining the loan, such as requiring the lender to agree to an alternative remedy to repurchase (for example, executing an indemnification agreement). In some cases, Fannie Mae will issue a repurchase or make whole request to the lender. The defects that give rise to a repurchase or make whole request consist of errors or failures that Fannie Mae identifies as significant.
This Guide contains timelines by which lenders must pay Fannie Mae the funds that are due in connection with a repurchase or make whole request. If a lender delays in this or has a pattern of unresponsiveness, Fannie Mae may consider this a breach of contract and consider other actions against the lender, up to and including termination.
For performing mortgage loans with significant underwriting deficiencies, Fannie Mae may not require immediate repurchase, but may instead request indemnification. The nature and severity of the findings, financial and operational strength of the lender, the quality of the mortgages sold, servicing performance, and the loan payment history are criteria used by Fannie Mae in deciding whether to use this option.
Appeal of Fannie Mae QC Review Decisions
Fannie Mae maintains a process for lenders to appeal repurchase and make whole requests. The appeals process is very effective for loans with defects such as missing documentation or other curable deficiencies. A repurchase or reimbursement request may be rescinded because the lender provides documentation within the time period specified by Fannie Mae (when a cure has been offered to the lender).
Additional Information
For additional information regarding mortgage loan repurchases, repurchase alternatives available for mortgage defects that do not rise to the level of a repurchase request, and the appeals process, see A2-3.2-03, Additional Policies Related to Mortgage Loan Repurchases (06/24/2014).
About the Author:
Anna 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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