Watt announces changes to Representation and Warranty Framework

October 21, 2014

LAS VEGAS (10/22/14)--Mortgage lenders soon will be provided with more certainty about requirements for covering losses on loans sold to Fannie Mae and Freddie Mac, according to Federal Housing Finance Agency (FHFA) Director Mel Watt. Speaking at the Mortgage Bankers Association convention in Las Vegas Tuesday, Watt outlined upcoming revisions and clarifications to the agency's Representation and Warranty Framework.

He noted the agency is also working to develop new guidelines for mortgages with loan-to-value ratios between 95% and 97%, which Watt said will "responsibly serve a targeted segment of creditworthy borrowers with lower down payment mortgages by taking into account 'compensating factors.'"

Representations and warranties provide assurances that allow Fannie and Freddie to purchase loans efficiently without checking each loan individually or being at each closing. They also provide both entities remedies to address situations when lenders' obligations to meet purchase guidelines have not  been fully met.

Credit Union National Association Deputy General Counsel Mary Dunn said CUNA is encouraged by Watt's comments.

"This will ensure that any lender outliers will manage their risk, and it is not targeted at those which comply and have already adopted efficient and responsible lending practices," she said. "While we will be reviewing the details as available, this proposal will mitigate some of the concerns that credit unions have regarding their need for more flexibility on mortgages."

Dunn added that CUNA is pleased the agency is working to allow the purchase of home loans with a 3% down payment, which she called "a move that will open doors to home loans to creditworthy borrowers."

Critics have said that the FHFA framework did not originally provide enough clarity to enable lenders to understand when Fannie or Freddie would exercise their remedy to require repurchase of a loan. Lenders also reported credit overlays that drove up the cost of lending and restricted lending to certain borrowers.

"To address this problem, FHFA and the enterprises (Freddie and Fannie) have worked to revise the Framework to ensure that it provides clear rules of the road that allow lenders to manage their risk and lend throughout the enterprises' credit box," Watt said in his remarks.

The upcoming changes identified by the FHFA head include clearly defining six categories of life-of-loan exclusions:

  • Misrepresentations, misstatements and omissions;
  • Data inaccuracies;
  • Charter compliance issues;
  • First-lien priority and title matters;
  • Legal compliance violations; and
  • Unacceptable mortgage products.

The agency also clarified that only life-of-loan exclusions can trigger a repurchase under the framework for loans that have already earned repurchase relief.

Watt said more details about the updated definition for each life-of-loan exclusion, as well as the new lower down payment mortgage guidelines, will be announced in the coming weeks.

Use the resource link below for the full text of Watt's remarks.

FHFA Director Mel Watt at MBA Annual Convention