Fannie Mae has warned its servicers that they face a new wave of mortgage buyback requests — this time for defects on unsecured loans that were extended to delinquent mortgage borrowers.
Last week the government-sponsored enterprise cited six errors that servicers frequently make as it issued new guidelines for its HomeSaver Advance program, under which an unsecured loan for up to $15,000 is given to the borrower to cover arrears. These range from clerical mistakes, such as filling out the wrong form, to more significant problems like using the program on mortgages that are ineligible. Such errors can put a servicer on the hook to repurchase the unsecured loans, Fannie said.
The new guidelines apply retroactively, meaning the GSE can make a servicer buy back any of the 71,000 advances Fannie has bought since it started the program last year, if they are found to be defective.
"Everybody gets the sense that there's going to be a big 'gotcha' because delinquencies are rising and they want to put the risk on somebody else," said Cheryl Lang, the president of Integrated Mortgage Solutions, a Houston consulting firm.
"It's like having the rules changed in the middle of the game," she said. Fannie should have "spelled out the rules of engagement" for servicers when it unveiled the program a year ago.
Terence O'Hara, a Fannie spokesman, said the guidelines "ensure the proper administrative practices are in place in the origination and servicing of HomeSaver Advance loans."
"HomeSaver Advance remains an important part of Fannie Mae's foreclosure prevention efforts," he said.
Bob Appel, an executive vice president at Nationstar Mortgage LLC, a Dallas servicer owned by the New York private-equity firm Fortress Investment Group LLC, said Fannie is choosing the "stick to go with the carrot" approach of offering an incentive fee of $600 for each advance successfully completed.
He said in an e-mail that the new guidelines "spell out a reasonable expectation of servicers" and do not diminish the program's effectiveness.
"If servicers execute the program properly, they can avoid the pain of a repurchase," Appel said.
But servicers have been increasingly feeling such pain since last year, when Fannie and Freddie Mac stepped up requests to buy back mortgages that had gone bad. Freddie, for example, made its servicers repurchase $1.8 billion of loans last year, 165% more than in 2007. Fannie said in its 2008 annual report that it "significantly increased the number of repurchase and reimbursement requests we have made due to the higher default rate … which increases the number of reviews we conduct for compliance with our delivery representations and warranties." (The GSE did not disclose the volume of such requests.)
"Servicers are extremely concerned about repurchase risk," said John Anderson, an executive vice president at Clayton Holdings Inc. in Shelton, Conn., which owns Quantum Servicing Corp.
HomeSaver advances far outnumbered loan modifications at Fannie last year. One reason is that, unlike a modification, an advance does not require Fannie to buy the mortgage out of a securitized pool and take a fair-value loss.
When Fannie introduced HomeSaver Advance last year, it told servicers that only mortgages in which the GSE holds all the credit risk were eligible for the program. For a type of mortgage on which the servicer pays a lower annual guarantee fee to Fannie in return for accepting some of the credit risk, a servicer was free to make an unsecured advance on its own, but Fannie would not buy it.
In the guidelines published last week, Fannie told servicers that it will make them buy back advances if the GSE discovers, after the fact, that the related mortgage was ineligible.
Mortgage servicers do not handle billing and collection for HomeSaver advances. Fannie has given that job to Dyck O'Neal Inc., an Arlington, Texas, collection agency.
Another common problem with advances that Fannie said can trigger buyback requests is failure to get paperwork to Dyck O'Neal within 90 days of notifying the servicer it is missing.
Lang asked why Fannie chose to offer unsecured personal loans instead of capitalizing arrearages onto the mortgage without creating a separate debt instrument.
"Borrowers are going to walk away from these loans before they walk away from their house, and it raises questions of how tough they are going to be in pursuing these notes," she said. "This is not a good time to be extending more debt to homeowners who are ill-positioned to pay."