On September 11, 2012, the Federal Housing Finance Agency (the "FHFA"), adopted a new framework for representation and warranties developed and suggested by  Fannie Mae and Freddie Mac (the "GSEs") applicable to conventional single family loans. In order for the new framework to apply to the property, the loans have to meet a payment history and other requirements established by the GSEs be sold or delivered to the GSEs on or after January 1, 2013 (these changes do not affect loans sold or delivered before January 1st, 2013). The objectives of the new framework are (i) to give lenders more certainty and transparency in their loan repurchase obligations by adopting an approach that needs to be consistently followed by the GSEs when they provide relief to eligible loans by repurchasing them, and (ii) to enhance the quality of the GSEs' portfolios by moving the quality control review to immediately after the loan delivery, instead of after the loan default. This new framework applies to purchase money mortgage loans and to Home Affordable Refinance Program ("HARP") loans. The following is a brief summary of the changes.

The New Representation and Warranty Framework

Main Objectives

Quality Control

  • Under the direction of the FHFA, the GSEs are working to develop a consistent approach to quality control; however the approach is to be released at a future date. This time around there is supposed to be an enhanced quality control process actually 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. However, they expect the sampling to increase and that there will be more in-depth reviews. They further expect 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.

Contract Harmonizatiom

  • 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 in their contracts with lenders. While we have been expecting these changes and under the assumption that a contract harmonization was actually already taking place, we can only hope that it actually is efficient this time.

Eligible Loans

To be eligible for the new selling representation and warranty framework, the loan must comply with the following requirements:

  1. The loan must have been acquired or have an MBS issue date or settlement date on or after January 1, 2013 or later acquisition date.
  2. 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.
  3. The loan cannot be a government guarantee or insured loan. It must be a conventional mortgage loan, sold to the GSE on a flow basis. Fannie Mae has indicated that loans sold on a flow or bulk basis may be eligible on a negotiated basis; Freddie Mac will not do so.
  4. The loan may not have been sold to the GSE with any credit enhancement other than traditional primary mortgage insurance. Fannie Mae  has indicated that loans with other credit enhancements may be eligible on a negotiated basis; this again will not apply with Freddie Mac.
  5. 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.
  6. 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.
  7. The loan must not be subject to an outstanding request for repurchase, repurchase alternative or make-whole payment.

Relief

In the case of an eligible loan, a GSE will not exercise its remedies, such as 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.

Exclusions

The lender will not be relieved from enforcing breaches of representations and warranties and will remain responsible for life of loan representations and warranties, even with respect to eligible loans, in the following circumstances:

  1. 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:
      1. have a loan-to-value ratio ("LTV") of 80% or less at the time that the GSE acquires the loan; or
      2. 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 in which the lender retains a minimum 10% interest.
  2. 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 to properly 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

  1. 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).
  2. 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.
  3. 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.

REMAINING OBSERVATIONS

While the new approach tries to remedy the situation, it fails to recognize that 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. While there exist other legislative approaches to remedying the solution, such as the Menendez-Boxer bill, none seem to really alleviate all the pressures in the market.

Additionally, the "safe harbor" created by this new framework 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. Therefore, it does not provide true certainty as to a lender's repurchase obligations.

 

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*This article is not intended as legal advice, but as general information. It also does not create any client-attorney relationship or privileges. Every situation is different and requires an individual analysis.