Watt Focuses on Reps/Warrants; 97% GSE Loan Mentioned Only in Passing

Federal Housing Finance Agency (FHFA) Director Melvin L. Watt focused his remarks to attendees at the Mortgage Bankers Association annual conference on the issue of representation and warranties.  He acknowledged that fears of being forced to repurchase large numbers of loans after they have been sold to one of the two government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac has created unease among lenders almost from the start of the mortgage crisis.

Watt said that the Representation and Warranty Framework in use by the GSE's provides them the necessary assurances they need to purchase loans in an efficient and responsible manner without checking each loan individually or attending every closing. They also provide the Enterprises remedies to address situations where a lender's obligations to meet the Enterprises' purchase guidelines have not been fully met. 

But he also acknowledged that the Framework did not provide enough clarity to enable lenders to understand when Fannie Mae or Freddie Mac would exercise their remedy to require repurchase of a loan.  This has contributed to lenders imposing credit overlays that drive up the cost of lending and also restrict lending to borrowers with less than perfect credit scores or with less conventional financial situations.

He said that these concerns have led FHFA and the GSEs to place increased attention and resources on upfront quality control reviews and to revise the Framework to ensure that it provides clear rules of the road that allow lenders to manage their risk and lend throughout the GSEs' credit box.

Significant improvements have already been made to the Framework; the first which went into effect in January 2013.  It sunsets representation and warranties obligations related to the underwriting of the borrower, the property or the project for loans after a 36-month history of clean payments.  Last May there were additional refinements around this 36-month benchmark which included allowing up to two 30-day delinquencies during the 36 months after acquisition; notifying the lender when loans meet that performance benchmark or pass a quality review, and eliminating automatic repurchase demand when primary mortgage insurance is canceled.

Watt said that there is an ongoing process to address the issue of life-of-loan exclusions which allow the GSEs to require lenders to repurchase loans throughout their lifetime because of instances of fraud or other significant noncompliance. The current life-of-loan exclusions, he said, are open-ended and make it difficult for a lender to predict when or if Fannie Mae or Freddie Mac will apply one of them.  The GSEs and FHFA have now reached an agreement in principle on how to clarify and define these exclusions to facilitate market liquidity without compromising the safety and soundness of the GSEs.

Life-of-loan exclusions will be more firmly defined so lenders will know what they are and when they apply to loans that have otherwise obtained repurchase relief. These exclusions fall into six categories: 1) misrepresentations, misstatements and omissions; 2) data inaccuracies; 3) charter compliance issues; 4) first-lien priority and title matters; 5) legal compliance violations; and 6) unacceptable mortgage products.  Second, where loans have already earned repurchase relief, new rules will make clear that only life-of-loan exclusions can trigger a repurchase, hopefully ending confusion on this issue.

The GSEs swill provide details on the updated definitions soon, but Watt highlighted some aspects of the refined definitions of misrepresentations and data inaccuracies.   First, there will be a minimum number of loans that must be identified with misrepresentations or data inaccuracies to trigger the exclusion.  This will allow the GSE's to act if a pattern emerges but not to revoke relief already granted because of problems with a single loan.  Also a "significance" requirement is being added which will require the GSEs to determine that the loan would have been ineligible for purchase initially if the loan information had been accurately reported.

Watt said there still remains more work to be done on the Framework and FHFA is already focused on developing an independent dispute resolution process and identifying cure mechanisms and alternative remedies for lower-severity loan defects. FHFA also continues to make progress on issues concerning servicing representations and warranties, and has reached an agreement in principle on modifying compensatory fees and foreclosure timelines.

Some analysts had expected that Watt might announce that the GSEs would start purchasing mortgages with loan-to-value ratios between 95 and 97 percent.  He did not go that far but did say that FHFA is working with the GSEs to develop sensible and responsible guidelines for mortgages with 3 percent downpayments. He said he believed that the GSEs will be able "to responsibly serve a targeted segment of creditworthy borrowers with lower-down payment mortgages by taking into account "compensating factors." While this is a much more narrow effort than our work on the Representation and Warranty Framework, it is yet another much needed piece to the broader access to credit puzzle."  Further details, he said, would be available about this new guidelines in coming weeks. 

Development of the Common Securitization Platform (CSP) is progressing, Watt said.  The governance structure and operating agreement have been revised and the Board is close to being able to announce the selection of a Chief Executive Officer to run the CSP's governing entity Common Securitization Solutions (CSS).  Each GSE has designated staff to work at the CSS location and during the year this team has been developing the platform.  FHFA and the GSEs are also working on a single security to reduce trading disparities between Fannie Mae and Freddie Mac.

In addition to these issues and proposals, Watt said FHFA continues to work on other priorities as well.  Tight credit remains a problem and many individuals and families are still facing the possible of foreclosure.  FHFA is evaluating ways to refine and improve loss mitigation and foreclosure prevention policies at the GSEs and seeking ways to extend access to credit.

Finally Watt also announced that FHFA has extended the comment period for a Proposed Rule dealing with the membership requirements of the Federal Home Loan Banks for another 60 days to January 12, 2015.