WASHINGTON - Small lenders are hoping a new representation and warranty framework by Fannie Mae and Freddie Mac will offer them alternatives to loan repurchases.
The two government sponsored enterprises routinely require small lenders to repurchase new loans with minor defects or other problems.
Larger lenders often have the option to indemnify Fannie and Freddie for losses if they go into default, but the GSEs generally don't offer this option to small lenders.
The Independent Community Bankers of America and Community Mortgage Lenders of America are urging the Federal Housing Finance Agency and the GSEs to offer a broader menu of alternatives to loan repurchases, including indemnification and limited recourse.
"Generally those options are made available to larger players" but not smaller ones, said Ron Haynie, the senior vice president for mortgage finance policy at the ICBA. "It should be offered on a regular basis to more lenders."
Currently the GSES are "very selective" when it comes to indemnification due to counterparty risk, Haynie said.
"It comes down to what the issue is and the resources of the counterparty standing behind it," said Haynie.
Members of the Community Home Lenders Association are also complaining that newly originated loans bought by Fannie and Freddie are getting kicked back for relatively minor flaws.
"It has made them really gun shy," said Glen Corso, the executive director of the group, who said it is forcing lenders to be very conservative in their underwriting. "They don't want to take any chances for fear of a repurchase demand."
It also is a "long, drawn-out fight" to get Fannie and Freddie to rescind repurchase demands, Corso said. The trade group would like to see a better appeals process.
"Lenders should be given an opportunity to correct minor flaws in performing loans. If these flaws cannot be corrected, indemnification should be the preferred option, rather than repurchase," said Paulina McGrath, the president of Houston-based Republic State Mortgage Company and chairman of the CMLA, in a press release.
Watt recently announced efforts to further clarify representation and warranty policies to reduce repurchases and to design an appeals process.
"We are encouraged by the direction things are taking," Corso said. "But our lenders have learned the details are critically important so they are reserving judgment until the details come out."