March 31 is D-day for year-2000 compliance in the secondary mortgage market.

Both Fannie Mae and Freddie Mac have said that customers servicing their loans must report compliance that meets a series of deadlines leading up to March 31, the day when all outside parties must have passed compliance testing.

Fannie Mae is requiring all customers to be compliant, but Freddie Mac is requiring compliance only of those servicing 1,000 or more loans for it.

Robert J. Engelstad, senior vice president of credit policy at Fannie Mae said emphases are being placed on two distinct customer groups. "We're worried about smaller companies that may not have the investment capital for compliance efforts. We also have a relatively small number of large lenders that service most of our loans, so we want to make sure they're up to speed as well."

Mr. Engelstad said the agency deals with more than 1,500 companies but fewer than 50 account for 70% to 80% of its loans.

Jim Cotton, Freddie Mac's vice president of customer support, said his company decided that smaller clients using Freddie Mac software need not pursue additional industry testing.

"They're using our software, and we've already tested it," Mr. Cotton said. "We have over 500 customers who service less than 100 loans and 2,000 customers that do less than 1,000 loans; to require industry testing for them was not the best way to measure their risk-mitigation efforts."

Mr. Cotton said Freddie Mac is able to cover 97% of its outstanding portfolio despite the 1,000-loan cutoff. Most of the smaller companies are regulated institutions that use compliant service bureaus, he said.

A large part of the risk-mitigation effort lies with the Mortgage Bankers Association of America's Year-2000 Readiness Test.

KPMG Peat Marwick is the effort's executive arm, and Alltel, First American Real Estate Services, Freddie Mac, and Fannie Mae supplied seed capital to get the testing started.

A hard copy reference binder with directions on how to execute compliance tests has been made available. It lists vendors and servicers involved, test scenarios and cases, and expected test results.

Sixteen transactions-which the MBA has defined as any business process that requires two trading partners-are covered in the test: five in originations, three in the secondary market, and eight in servicing.

"It has all the transactions that the MBA has determined are mission- critical for trading partners," said Matt Dixon, KPMG project manager. "It doesn't test internal functionality; it's meant to verify a company's ability to exchange information between trading partners in" a year-2000 environment.

Fannie Mae is requiring all its sellers and servicers to be compliant in three servicing transactions: security balance, investor and default reporting. Freddie Mac requires the latter two.

The cost of the test binder is $1,250 for MBA members, $1,500 for affiliates, and $1,750 for nonmembers.

"We have a high degree of awareness, and we've registered a significant number of participants," Mr. Dixon said. "The money goes to the MBA, which is paying the extensive costs of Y2K testing."

The consequences escalate for violating compliance deadlines at either agency. If a customer cannot become compliant, it will be expected to find a sub-servicer to take over its loans, then to sell the servicing, and ultimately to see the agencies force-place the servicing with a company in compliance.

The Federal Financial Institutions Examination Council has also dictated a certain level of year-2000 compliance for due diligence, and participation in the MBA testing can be part of that.

"If you can't send electronic investor reporting information, you're out of business, and that's how they determined what was mission-critical," Mr. Dixon said. "We don't want all these people running at the ninth hour to get this done."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.