After years of litigation costing tens of millions of dollars, the Federal Housing Finance Agency has hit upon a way to expedite resolution of breach of representation and warranty claims that, if successful, could minimize costs.
The FHFA announced that Fannie Mae and Freddie Mac will, from now on, purchase loans that provide for independent dispute resolution (IDR) for any alleged breach of representations or warranties. This would be a substantial change from the current process, in which breach claims could spur repurchase demands and rescission requests that can lead to years of argument and sometimes costly resolutions.
Representations and warranties (R/W) are an important component of any lender’s effort to sell its loans to government sponsored entities like Fannie Mae or Freddie Mac. Indeed, GSEs rely on lender’s explicit guarantees that loans purchased are underwritten to Fannie’s or Freddie’s underwriting guidelines – that itself is perhaps the most important representation and warranty. Under the present framework, if a GSE concludes that a R/W was breached, it may pursue repurchase, a “make-whole” agreement, or any number of alternative remedies. But those remedies can lead to months of correspondence and demands for documentation and proof, and may lead to litigation.
The new program seems aimed at streamlining the process and allowing both the GSEs and lenders to have a better understanding of their mutual expectations. For the GSEs, the arrangement allows for predictability and a faster method of resolving claims against lenders. The lenders, in turn, can expect a simplified process for selling to the GSEs and a clearer understanding of how R/W and repurchase claims will proceed. Perhaps most importantly, it allows lenders to refer disputes to a third party neutral for resolution. Doing so would likely reduce the time and expense of resolving R/W disputes, which is certainly a benefit for lenders.
The IDR process provides the [GSEs] and lenders a mechanism for resolving a repurchase dispute and avoiding the possibility that a dispute might languish unresolved for an extended period of time as has often occurred in the past,”
said FHFA Director Melvin L. Watt. “IDR is the final part of the Representation and Warranty Framework which, taken as a whole, will increase clarity for lenders and will ultimately increase access to mortgages for creditworthy borrowers.”
Mortgage industry representatives have welcomed the news, positing that it will remove some of the opacity that has characterized the GSEs approach to repurchase issues. Mortgage Bankers Association CEO David Stevens believes that “FHFA, Fannie Mae and Freddie Mac should be commended for their work over the last four years on the representation and warrant framework. The independent dispute resolution process is an important final piece to this effort.” Stevens went on to say that, in its totality, “the representation and warranty framework will provide much needed certainty and transparency for lenders of all sizes and help broaden access to credit for borrowers. MBA is glad to have contributed to this initiative and we look forward to continuing to work with FHFA, the GSEs and other stakeholders in helping to create a sustainable lending environment that reasonably expands credit for all borrowers interested in the home buying process.”
The changes come as the culmination of a years-long revision in GSE risk management and repurchase policies. No doubt they are (at least in part) a response to loan sellers’ tremendous frustration that, so many years after the mortgage and banking crisis of 2008, they are still having to deal with repurchase and indemnification demands relating to loans sold prior to that crisis.