The Federal Housing Finance Agency issued new guidance Sept. 11 that’s aimed at limiting a banks’ risk of having to buy back defaulted mortgages by clarifying lenders’ repurchase exposure and liability. The clarification is designed to make it easier for consumers to get mortgages.
The new rules will apply to conventional loans sold or delivered on or after Jan. 1, 2013; existing loans still are subject to buy backs, with Fannie and Freddie ramping up efforts in this area.
Since 2005, Fannie and Freddie have forced banks to repurchase nearly $75 billion of mortgages that have defaulted, and as a result, banks have raised their lending standards beyond what the two government-sponsored enterprises require, scrutinized appraisals and demanded extensive documentation of a borrower's income and assets in order to protect themselves from future buyback demands.
Talking to The Wall Street Journal about the new rules, Maria Fernandez, the FHFA’s associate director for housing and regulatory policy, said that “lenders have pulled back because they don't know what their future exposure around repurchases is going to be ... ultimately that has limited the availability of mortgage credit.”
The agency's goal, she added, “is to be very clear with lenders what our expectations are so we can help facilitate more liquidity.”
The new rules will bring about such changes as releasing banks from having to buy back a loan under certain conditions if the mortgage has a record of on-time payments for the first 36 months, or for the first 12 months on loans that are part of an existing refinancing initiative, such as the Home Affordable Refinance Program.
“Ultimately, better quality loan originations and underwriting, along with consistent quality control, help maintain liquidity in the mortgage market while protecting Fannie Mae and Freddie Mac from loans not underwritten to prescribed standards,” Edward J. DeMarco, acting director of FHFA, said in a news release. “These efforts contribute to a firm foundation for a new, sustainable housing finance system for the future.”
The new rules will direct Fannie Mae and Freddie Mac to:
• Conduct quality control reviews earlier in the loan process, generally between 30 to 120 days after loan purchase;
• Establish consistent timelines for lenders to submit requested loan files for review;
• Evaluate loan files on a more comprehensive basis to ensure a focus on identifying significant deficiencies;
• Leverage data from the tools currently used by Fannie Mae and Freddie Mac to enable earlier identification of potentially defective loans; and
• Make available more transparent appeals processes for lenders to appeal repurchase requests.
According to the Journal, industry analysts said the impact of the new rules would depend on how they’re enforced by the GSEs. “If you have written guidance from these quasi-government agencies what their terms are, they can't really walk away from that,” Laurence Platt, a banking industry lawyer at K&L Gates, told the Journal.
See more of the FHFA’s new rules.