Mortgage lenders have complained bitterly about the risk and uncertainty of having to buy back defective home loans from Fannie Mae. Now Fannie is planning to offer yet another carrot to lenders that have lobbied extensively for relief from loan repurchases.
Fannie will retain some home loans that have defects but are still considered to be within their risk appetite. Fannie's so-called repurchase alternative would give mortgage lenders an exit strategy for some defective loans that fall short of Fannie's guidelines but are still expected to perform well over their lifetimes.
Lenders would pay a "risk fee" of roughly 2% to 4% of the loan amount, a less-expensive alternative than a full buyback request. The size of the fee is subject to change once the new program is rolled out.
"If the loan has a defect but is of good quality, Fannie will offer a repurchase alternative," Catherine Zimmerman, a Fannie senior credit risk manager in Los Angeles, told mortgage lenders at a conference in Costa Mesa, Calif., last week.
Fannie is still finalizing which defects in a home loan would be appropriate for an alternative to a repurchase.
Lenders typically have to repurchase a loan if there is a significant defect in credit quality or underwriting. But some defects can be corrected and others may not require any correction or remedy from the lender.
The buyback alternatives are part of an evolution at both Fannie and Freddie Mac in their "representation and warranty" frameworks, first released in 2012 and revised in 2014 and 2015. Lenders have complained that the threat of buyback demands and related litigation is still too great, despite reforms by the government-sponsored enterprises.
Fannie is expected to announce its repurchase alternative framework in the first quarter. Technically, Fannie has long said alternatives were an option for lenders but it had never spelled out the process.
Zimmerman said Fannie's philosophy is to ensure appropriate options are provided to lenders for performing, investment-quality loans. But Fannie also wants to ensure that lenders are focused on making sound loans that pose no excessive risks.
"We don't want lenders to take the repurchase alternative over and over again," Zimmerman warned lenders last week.
Lenders are encouraged to correct defects in their processes so those that try to use the repurchase alternative process repeatedly will be denied its use, Zimmerman said.
Fannie created the repurchase alternative to level the playing field for lenders of different sizes and financial strength, including independent mortgage banks that can be particularly squeezed by repurchase requests.
In the past year, Fannie has been testing options for alternatives by working with lenders and asking for their input. Fannie also got input from a lender working group with the Mortgage Bankers Association.
Lenders initially got relief from certain repurchase obligations for loans sold after 2013, as long as the borrower made 36 months of consecutive, on-time payments. Lenders that refinanced borrowers using the government's Home Affordable Refinance Program got relief from repurchasing bad loans after just 12 months of consecutive, on-time payments.
In May 2014, Fannie and Freddie adopted even looser "sunset periods," allowing loans with two 30-day delinquencies (but no 60-day delinquencies) over the 36-or 12-month periods to qualify.
But lenders have continued to complain about life-of-loan exclusions that allow Fannie and Freddie to require that a lender repurchase loans at any point if they fall into one of six categories, including misrepresentations or misstatements, and data inaccuracies.
For several years now, the GSEs have reviewed loans within 120 days of when they are purchased through a combination of random and targeted sampling. The up-front due diligence has meant that a majority of loans subject to repurchase demands were current (i.e. performing) at the time of repurchase.
It can be tough to get a complete picture of Fannie's repurchase activity because a significant number of loans were put back to lenders through settlements with regulators.
Some of the data collected on repurchases also does not include the nontraditional loan products, such as interest-only loans or less-than-full documentation loans, with much higher repurchase rates, according to a report earlier this year from the Urban Institute's Housing Finance Policy Center.
Fannie's purchase demands have plummeted over the past few years. Fannie repurchased 7,175 loans issued in 2010 but just 2,815 in 2014, the center found.