Fannie Mae and Freddie Mac on Thursday revised their representation and warranty frameworks to provide lenders clarity on an issue they have long raised as a sticking point in housing reform, and one that some say has made lenders less willing to extend credit.
The two government-sponsored enterprises outlined in greater detail how and when they would make lenders repurchase loans found to be flawed. Such policies are designed to safeguard against problem loans making their way into the system.
"With this clarity, lenders should have greater confidence in lending to Fannie Mae's full credit standards and making mortgages available to more borrowers," said Andrew Bon Salle, executive vice president at Fannie Mae, in a statement.
The new guidelines put greater emphasis on "significant" misrepresentations or data inaccuracies in loan files, with errors triggering buybacks only in cases where lenders demonstrate a habitual pattern of making the same mistake.
While the threshold for misrepresentations increased to three loans from two, and the threshold for data inaccuracies increased to five loans, the GSEs' bulletins on the changes don't specify the timeframe that those errors must occur during to constitute a pattern of habitual mistakes.
Loans involving fraud are subject to repurchase regardless of the circumstances, and the new policy is retroactive to January 1, 2013.
"Lenders have been specifically concerned that the life of loan exclusions could undermine the selling representation and warranty relief, leaving a back door for the GSE to put loans back to them after granting relief," David Lowman, Freddie Mac executive vice president, said in a statement. "Addressing these concerns by providing tighter definitions and clarity should encourage sellers to serve a broader range of qualified borrowers."
Investment bank and mortgage analysts called the agencies' details meaningful, but not a watershed for mortgage credit.
"I would describe this change as 'evolutionary,' rather than 'revolutionary,'" said Brian Ye, agency mortgage strategist at JPMorgan Securities.
"We do not believe that the mortgage credit spigot will be turned on full blast given remaining fundamental and policy overhands, but our view remains that policymakers will take steps to twist the knob a few turns to the left in 2015," said Isaac Boltansky, an analyst at Compass Point Research & Trading.
In another area of buyback relief for lenders, the GSEs amended the "Compliance with Laws" section of their respective seller guides to limit the instances in which a lender's violation of federal, state or local law can trigger a buyback.
Fannie and Freddie will now limit repurchases to instances where a lender's failure to comply with applicable laws impairs their ability to enforce or assign a promissory note or mortgage, or when loans violate one of five federal consumer protection regulations. Previously, the GSEs could force a buyback for any violation that may have a material impact on the agencies.
The Thursday update comes exactly one month after Mel Watt, director of the Federal Housing Finance Agency, promised the industry he would deliver additional details in a speech he made at the Mortgage Bankers Association's Annual Convention in Las Vegas.
"We know that this issue 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," Watt said October 20.
The changes come after intense industry lobbying, including a meeting between a group of lenders and government officials held in mid-October at the White House, and follow a previous round of changes in May, when Fannie and Freddie began providing lenders relief from buybacks via loan quality control reviews. Even after the earlier changes and calls for more access to credit, lenders had continued to take a wait-and-see approach to loosening their credit standards out of fear of buyback requirements.
Lawmakers took to Capitol Hill this week to instill in Watt their concerns over the direction he may lead the agency and the pace at which he is moving. Democrats lambasted Watt, an Obama appointee and former congressman, for not doing enough to expand access to credit to all borrowers.