The Federal Housing Finance Agency is close to issuing refinements to the government-sponsored enterprises' representation and warranty framework that will limit lender liability on buybacks of legacy loans.
"We have reached an agreement in principal on how to clarify and define the life-of-loan exclusions," Federal Housing Finance Agency Director Mel Watt said in a speech to the Mortgage Bankers Association's annual conference in Las Vegas on Monday.
Life-of-loan exclusions essentially allow Fannie Mae and Freddie Mac to require lenders to repurchase loans at any point during the term of the loan, increasing liability for banks and mortgage lenders. But the FHFA wants to change that in an effort to boost credit availability.
"The current life-of-loan exclusions are open-ended and make it difficult for a lender to predict when, or if, Fannie Mae or Freddie Mac will apply one of them," Watt said. "The new life of loan exclusions will result in better representation and warranty framework and facilitate market liquidity."
Buybacks by the GSEs have been blamed in part for the continuing credit crunch, a problem Watt acknowledged in his speech. Worried about a potential putback, lenders have raised prices on loans by purchasing credit overlays and limited lending to borrowers with lower credit scores.
Watt pledged to "more clearly" define life-of-loan exclusions so that lenders will know "what they are and when they apply to loans that have otherwise obtained repurchase relief."
The exclusions fall into six categories: misrepresentations, data inaccuracies, charter compliance issues, first-lien priority, legal compliance violations and unacceptable mortgage products.
The GSEs are in the process of updating the definitions for each of those categories, which will be unveiled in the next few weeks, Watt said.
But he previewed a few changes, saying Fannie and Freddie will set a "minimum number of loans that must be identified with misrepresentations or data inaccuracies to trigger the life-of-loan exclusion."
"This approach allows the enterprises to act when there is a pattern of misrepresentations or data inaccuracies that warrant an exclusion, but not to revoke repurchase relief they have already granted if they subsequently discover that a lender incorrectly calculated the debt-to-income ratio or loan-to-value ratio on a single loan," Watt said.
The GSEs are also planning to add a "significance" requirement to the misrepresentation and data inaccuracy definitions. That test will require Fannie and Freddie, using their automated underwriting loans, to test whether the loan would have been ineligible for purchase if the loan data had been accurately reported.
Watt said that the GSEs remain focused on developing an independent dispute resolution process and identifying "cure mechanisms" for loan defects that are not considered severe.
Additionally, Watt pledged to increase access for less affluent borrowers, saying the FHFA is working with the GSEs to develop guidelines for mortgages with loan-to-value ratios between 95% to 97%.
"Through these revised guidelines, we believe that the Enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower-down payment mortgages by taking into account 'compensating factors,'" said Watt.
He also discussed the progress the GSEs are making in designing and building the Common Securities Platform that Fannie and Freddie will jointly own and use to issue mortgage backed securities.
The FHFA director noted it will be multiyear project and each enterprise has designated staff to work in the CSP project.
"During 2014, this team has been developing the technology and infrastructure of the common securitization platform," Watt said.
He expects to announce new management structure for the common platform and a chief executive before the end of the year.
