WASHINGTON — Private market mortgage insurance companies should better align their buyback and rescission policies with those of Fannie Mae and Freddie Mac, the Federal Housing Finance Agency said this week.
In a report issued Wednesday, the agency noted that the government-sponsored enterprises continue to "improve the quality and efficiency of the loan origination process" while reducing their risk of loan buybacks.
"These improvements help assure lenders that they can make loans that meet the Enterprises standards and not bear the risk of credit loss," the FHFA said.
The agency flagged differences, however, between the GSEs' policies and those of private mortgage insurance firms, warning that could create issues. The FHFA urged private market players to reduce lender liability by "specifying conditions under which the mortgage insurers cannot rescind coverage of loans sold to the enterprises."
"Once finalized, those conditions would be specified in the rescission relief principles, which in turn would be incorporated into the MIs’ master policies," the report said.
Industry representatives support the initiative.
"I think any prudent risk manager would look for opportunities to align those rescission policies with the rep and warrant framework of the GSEs," said David Stevens, president and CEO of the Mortgage Bankers Association.
Lindsey Johnson, president of U.S. Mortgage Insurers, stressed that "both representations and warranties and rescission relief principles are aimed at providing greater clarity about when a GSE can demand repurchase or an MI can deny a claim."
"As both representations and warranties and rescission relief principles continue to evolve there is an effort by both the lender industry and the MI industry to make sure they continue to have alignment," she said.
Meanwhile, Fannie and Freddie have been providing lenders with more feedback on origination trends and defects as part of their quality control process.
"To improve communications, Freddie Mac launched a QC Advisory Forum to share defect trends and discuss opportunities to minimize and correct defects in loans prior to delivery and began providing more information to its lenders on QC findings," the FHFA noted.
"Fannie Mae began publishing quality control reports for lenders selected for a review," the FHFA said. "It also published a handbook for lenders, 'Beyond the Guide,' which shares best practices for quality loan origination."
These bulletins on loan defects are "very helpful," Stevens said.
"We have been calling for greater color and feedback on risks in the market," he added. "It gives everyone better information."
After the housing crash and the subprime debacle, Fannie and Freddie forced lenders to buy back billions of dollars of single-family loans. In 2012 and 2013, Fannie reached settlements with Bank of America, CitiMortgage, JPMorgan Chase Bank, Wells Fargo and other lenders.
