On September 11, 2012, the Federal Housing Finance Agency (the "FHFA"), together with Fannie Mae and Freddie Mac (the "GSEs"), announced changes to the GSEs' representation and warranty framework for conventional single family loans that meet the payment history and other requirements established by the GSEs, and that are sold or delivered to the GSEs on or after January 1, 2013. The objectives of the new framework, which was developed by the GSEs at the direction of FHFA, are (i) to grant lenders more certainty and transparency with respect to their loan repurchase obligations through the adoption of a consistent approach by the GSEs in providing relief from repurchase obligations with respect to eligible loans, and (ii) to enhance the quality of the GSEs' portfolios by moving the quality control review to the period immediately following loan delivery, rather than the period following loan default. The changes do not affect any loans sold or delivered prior to January 1, 2013. There are no changes to the current representations and warranties; rather, the changes pertain to the GSEs' loan review procedures and to remedies in the event that breaches of representation and warranty relating to underwriting are discovered. The new framework applies both to purchase money mortgage loans and to Home Affordable Refinance Program ("HARP") loans. The changes were announced by Fannie Mae in Lender Letter LL-2012-05 and in Selling Guide Announcement SEL-2012-08, and by Freddie Mac in an Industry Letter and in Single-Family Seller/Servicer Guide Bulletin Number 2012-18. Please note that the outline below is a summary only, and that reference should be made to the GSE documentation and the FHFA news release for a full explanation of the new framework requirements.
The New Representation and Warranty Framework
With respect to an eligible loan (a loan meeting the requirements described below), a GSE will not exercise its remedies (including a repurchase request or make-whole payment) if the mortgage loan breaches certain selling representations and warranties relating to (i) underwriting of 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; (ii) underwriting of the subject mortgaged property, which includes the lender's analysis of the description and valuation of the property to determine its adequacy as collateral for the loan; and (iii) underwriting of the project in which the mortgaged property is located, which includes the analysis of the PUD or condo (and with respect to Fannie Mae, the co-op) project.
To be eligible for the new selling representation and warranty framework, the loan must comply with the following requirements:
- The loan must have a January 1, 2013 or later acquisition date: a whole loan purchased on or after January 1, 2013 or a loan delivered into an MBS with an issue date of January 1, 2013 or later (Fannie Mae) or a Settlement Date on or after January 1, 2013 (Freddie Mac).
- The loan must have an acceptable payment history by complying with one of the following: (a) the borrower was not 30 days or more delinquent at any time during the 36 months following the acquisition date, or for Refi Plus and DU Refi Plus loans (Fannie Mae) and for Relief Refinance Mortgages (Freddie Mac) the borrower was not 30 days delinquent at any time during the 12 months following the acquisition date; or (b) the borrower (i) had no more than two 30-day delinquencies and no 60-day or greater delinquencies during the 36 months following the acquisition date with respect to all prior scheduled monthly payments; and (ii) was current as of the 60th month following the acquisition date. With the exception of temporary buydowns, neither the lender nor a third party may escrow or advance funds on behalf of the borrower to be used for the payment of principal and interest under the terms of the mortgage for the purpose of satisfying the payment history requirement.
- The loan must be a conventional mortgage loan, sold to the GSE on a flow basis. Government guaranteed or insured loans are not eligible. Fannie Mae (but not Freddie Mac) has indicated that loans sold on a flow or bulk basis may be eligible on a negotiated basis.
- The loan may not have been sold to the GSE with any credit enhancement other than traditional primary mortgage insurance. Fannie Mae (but not Freddie Mac) has indicated that loans with other credit enhancements may be eligible on a negotiated basis.
- The loan cannot have been subject to a forbearance agreement, repayment plan, or otherwise have been modified from its original terms during the applicable qualifying pay history period referenced in item 2 above.
- Fannie Mae has indicated that with the exception of a loan purchased under the terms of a long-term standby purchase commitment, the loan cannot have had any delinquencies between the origination date and the Fannie Mae acquisition date. Freddie Mac does not address this issue.
- The loan must not be subject to an outstanding request for repurchase, repurchase alternative or make-whole payment.
The lender will not be relieved from the enforcement of breaches of representations and warranties, even with respect to eligible loans, as to the following matters, but remains responsible for life of loan representations and warranties:
GSE Charter Matters. The loan must meet all the following requirements of the applicable GSE Charter in order to be eligible for sale to the GSE:
- The loan must be secured by residential property with four or fewer units that is located in any of the 50 states, the District of Columbia, Guam, Puerto Rico or the U.S. Virgin Islands.
- The loan must have an original principal balance not greater than the applicable maximum loan limit in effect at the time of the GSE's acquisition of the loan.
The loan must:
- have a loan-to-value ratio ("LTV") of 80% or less at the time that the GSE acquires the loan;
- if the LTV is in excess of 80%, the loan must have mortgage insurance on the portion of the loan in excess of 80% of the property's value (or with respect to eligible refinance loans, must meet the GSE's requirements regarding mortgage insurance)
- The loan must be sold with recourse or sold on a participation basis where the lender retains a minimum 10% interest.
- Misstatements, Misrepresentations, Omissions and Data Inaccuracies
There must not have been any misstatement, misrepresentation or omission (whether or not known to the lender) by any party (including without limitation borrowers, property sellers, builders, real estate agents, lenders, mortgage brokers, loan officers, originators, appraisers, appraisal companies, closing agents, title companies or other third-party vendors performing origination services) pertaining to the borrower, the property or the project that:
- involved two or more mortgages or related real estate transactions
- was made by two or more of the aforementioned parties.
The loan must not have any Uniform Loan Delivery Data ("ULDD") inaccuracies that resulted from the lender's failure properly to implement, monitor or maintain its data capture and delivery process or system, if the data pertains to the borrower, the property or the project, if and to the extent that:
- such delivery data differs from the information documented in the loan file that was used by the lender to determine loan eligibility
- the information in the loan file indicates that the loan was not eligible on the terms delivered for acquisition by the GSE
- multiple loans are involved
Prior to the satisfaction of the payment history requirements, loans are subject to the GSE's standard requirements related to fraud, misrepresentation or misstatement. Lenders continue to be responsible for any fraud, misrepresentation or misstatement as to matters not related to the underwriting provisions described herein
Clear Title/First Lien Priority. The loan must meet the following requirements:
- Be sold by a lender who was the sole owner and holder of the loan, and who had the full right to sell and assign the loan to the GSE, not subject to another party's interest or agreement with any other party.
- Be a valid and subsisting first lien, enforceable in accordance with its terms and meeting the GSE's requirements for loan documents.
- Have a mortgagee policy of title insurance or other acceptable title evidence (Fannie Mae only).
- Permit foreclosure or other enforcement of the noteholder's rights and acquisition of good and marketable title to the property without incurring expenses or delays (Fannie Mae only).
- Compliance With Laws. The loan must be originated in compliance with all applicable laws and regulations, and, with respect to Fannie Mae, in accordance with Fannie Mae's responsible lending policies and policies adopted by Fannie Mae to implement or comply with directives and regulations issued by FHFA.
- Mortgage Product Eligibility. The loan must be a product eligible for sale to the GSE.
Automatic Repurchase Trigger
Any loan for which no full monthly payment is made for the first three months after acquisition by the GSE will be subject to a repurchase request. However, the lender may request an exception if there were unforeseen extenuating circumstances that caused the borrower default, and the GSE, in its sole discretion, may rescind the repurchase request after a review of the file to determine that the loan otherwise meets the GSE's requirements.
Quality Control Review
Integral to the new representation and warranty framework is the enhanced quality control process that is being implemented by the GSEs. The GSEs will continue to review loans on a random sampling basis augmented by targeted sampling, as they have in the past. It is anticipated that targeted sampling will be increased, that there will be more in-depth reviews and that there will be an increased focus on reviews during the period prior to the 12- or 36-month "sunset" of the underwriting representations and warranties. Both GSEs are reinforcing their commitment to provide lenders with detailed and timely feedback on their loan origination process. Both GSEs continue to maintain an appeals process whereby the lender may appeal repurchase requests.
SNR Denton Comments
Anticipated Future Developments
- Under the direction of the FHFA, the GSEs are working to develop a consistent approach to quality control, to be released at a future date
- Under the direction of the FHFA, the GSEs are undertaking an effort, known as "Contract Harmonization", to develop a set of common principles, standards, requirements and tools relating to lender representations and warranties, the delivery of quality loans, contract breaches and remedies, servicing metrics and overall lender performance management. Certain of the key Fannie Mae and Freddie Mac requirements will be aligned through changes to their contracts with lenders. The aim of Contract Harmonization, as stated in the FHFA's news release, is to provide the industry with a higher degree of certainty and clarity for future acquisition of Fannie Mae- and Freddie Mac-eligible loans and for servicing performance, and to lay a firm foundation for a new, sustainable housing finance system. Contract Harmonization supports the 2012 Strategic Plan for Enterprise Conservatorships.
- The success of the new mortgage repurchase framework - measured, in large part, on the basis of who will ultimately bear the risk of repurchases - depends on the ability of the GSEs to build quality control systems by January 1, 2013 that have the capacity to review massive volumes of loan files in a timely and accurate manner. If they are unable to do so, the GSEs will actually increase their risk exposure on defective mortgages because sellers will have a "safe harbor" under the new framework.
- The aggressive repurchase demands by the GSEs have accelerated in the past year, creating market and balance sheet uncertainty for the big mortgage market participants. This has resulted in attempts at legislative solutions, such as the Menendez-Boxer bill. The new repurchase framework may alleviate some of this political and industry pressure. However, these efforts are all prospective -- the real problems are retroactive and the new repurchase framework does not resolve them.
- A potential source of continued balance sheet uncertainty - and of conflict between the GSEs - is the overhang of repurchase claims prior to the effective date of the new repurchase framework, as buyers of loans seek to enforce repurchase obligations and holders of private label securities seek to force repurchases or rescissions as remedies. Continued review and criticism by the FHFA Office of Inspector General regarding past settlements that the GSEs have entered into1 will make it difficult to reach "business judgment" compromise settlements of claims. This will force the GSEs to take an "all or nothing" approach to the disputes and force litigation to judgment. For example, this approach will make it difficult, if not impossible, to settle the private label securities lawsuits that the FHFA has brought as conservator against the sellers and issuers of securities sold to the GSEs. Forcing these lawsuits to trial creates uncertainty: it leaves the GSEs in an adversarial position with their customers and the financing community, perpetuates balance sheet uncertainty, and delays resolution of issues indefinitely with no certainty of outcome.
- The "safe harbor" created by this proposal is not all-encompassing with respect to repurchase requirements and continues to provide the GSEs other means for requiring repurchases of loans pursuant to other terms of the GSE guidelines, and, therefore, does not provide true certainty as to a lender's repurchase obligations.
- The provisions of the new framework reflect many of the terms and issues of previous repurchase settlements that the GSEs have entered into in the past and that have been the subject of negotiations for many years.