WASHINGTON — Edward DeMarco, acting director of the Federal Housing Finance Agency, said Monday the agency will unveil a new representation and warranties model for conventional loans to help minimize risk exposure to lenders.
FHFA, along with Fannie Mae and Freddie Mac, will release the new framework for conventional loans sold or delivered on or after January 1 on Sept. 11, according to DeMarco. The agency is hoping that the new framework will help alleviate lenders' concerns about their exposure to putbacks.
"Lenders want more certainty about their risk exposure and the enterprises want to ensure the quality of the loans delivered to them," DeMarco said in a speech before the American Mortgage Conference. "This is a major step toward transitioning from the secondary mortgage market of the past to the secondary mortgage market of the future."
He said this step was essential for the market to properly recover.
"For the market to reclaim the strength it once had — and to provide a cornerstone for the mortgage market of the future — it is vital we consider ways to improve the representation and warranty model," DeMarco said.
The current model, for example, does not immediately recognize deterioration in the quality of the loans, which has wound up causing the enterprises to accept large volumes of mortgages that had not been originated by the contractual standard.
Under the new standards, quality control reviews by Fannie and Freddie will occur earlier in the loan process, typically between 30 to 120 days after the loan purchase.
Fannie and Freddie will also establish consistent timelines for lenders to submit requested loan files for review and will evaluate each loan with a focus on finding deficiencies.
"With better data and improved loan quality, we are providing a framework that will give lenders a higher degree of certainty and clarity around repurchase exposure as well as consistency around repurchase timelines and remedies," said DeMarco.
Under the new framework, lenders will also be relieved of certain repurchase obligations for loans that meet specific payment requirements. For example, relief will be offered on loans with 36-months of consecutive, on-time payments.
Lenders that are participating in refinance programs, including the Home Affordable Refinance Program, will be able to see relief after an "acceptable" payment history of one-year after acquiring the loan.
DeMarco added that as improvements are made, further steps will be taken to refine the process.
"This is an important step in improving upon past business practices," said DeMarco. "But it is only a first step. As the enterprises and market participants gain experience with this new framework, and as technology and automated processes develop, we expect additional improvements in this area."