Following Freddie, Fannie Lays Down the Law on Side Deals with Mortgage Insurers

Fannie Mae has declared war on so called "side agreements" that lenders have worked out with mortgage insurers to reduce their exposure to loan buybacks.

Under these agreements, the seller/servicer agrees to pay or indemnify the mortgage insurers for losses on certain mortgages.

"Effective immediately, Fannie Mae is prohibiting servicers from the entering into any agreement that modifies the terms of an approved mortgage insurance master policy on loans delivered to Fannie Mae," according to an April 15 servicing announcement.

The secondary market agency also is demanding that servicers disclose such agreements with the mortgage insurerss and provide a copy to Fannie.

In its fourth quarter securities filing, Fannie said it had required mortgage insurers to "notify us promptly of any such agreements to waive rights either to investigate claims or to rescind mortgage insurance coverage."

It is unclear if the mortgage insurerss complied with this request. Fannie had not responded by press time and one mortgage insurers company declined to comment.

Fannie and Freddie Mac rely on the mortgage insurers companies to investigate claims on loans to determine if underwriting defects or fraud led to the default. Lack of due diligence by the mortgage insurerss can result in additional losses to the GSEs.

Earlier this month, Freddie "reminded" its seller/servicers that they are not permitted to enter into such side agreements with the mortgage insurers companies.