Fannie Mae, Freddie Mac: Prepared Remarks of Melvin Watt, Director, FHFA, At the Mortgage Bankers Association Annual Conventio by FHFA
Prepared Remarks of Melvin L. Watt
Director, Federal Housing Finance Agency
At the Mortgage Bankers Association Annual Convention
Las Vegas, Nevada?
?October 20, 2014
Thank you for having me here this morning. It’s a pleasure to have my first op?portunity to share the stage with Secretary Castro. And, of course, I’m always happy to have the opportunity to talk about the important progress we are making at the Federal Housing Finance Agency (FHFA) to meet our obligations to ensure safety and soundness and liquidity in the housing finance market. I am very pleased to be speaking to mortgage bankers who play an important role in our housing market.
As regulator of the Federal Home Loan Banks and as regulator and conservator of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) (the Enterprises), we are working on a number of issues at FHFA that relate to our statutory obligations. We recently requested input and comment on several issues involving the Enterprises, including guarantee fees, eligibility requirements for their private mortgage insurer counterparties, proposed housing goal levels for 2015 through 2017, and a proposed Single Security structure. We have also requested comment on a Proposed Rule concerning the membership standards for the Federal Home Loan Banks.
In addition to these issues and proposals, FHFA continues to work on other priorities as well. We know that access to credit remains tight for many borrowers, and we are also working to address this issue in a responsible and thoughtful manner. Additionally, FHFA continues to evaluate ways to refine and improve the loss mitigation and foreclosure prevention policies at the Enterprises, because we understand that many individuals and families are still facing the possibility of foreclosure and are looking for alternatives to stay in their homes. I want to assure you that we are hard at work and making good progress on all these issues, several of which I will highlight in my remarks today.
Let me start by talking about one of FHFA’s key initiatives, revising and clarifying the Representation and Warranty Framework (Framework) under which lenders and the Enterprises operate. As you know, these representations and warranties provide the necessary assurances that allow Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) to purchase loans in an efficient and responsible manner without checking each loan individually or being at each closing. They also provide the Enterprises remedies to address situations where a lender’s obligations to meet the Enterprises’ purchase guidelines have not been fully met.
Over the last several years, we have worked to refine the Representation and Warranty Framework and to have the Enterprises place increased attention and resources on upfront quality control reviews. As part of this process, we have listened closely to your concerns about the impact that loan repurchases have had on your businesses, and we understand that addressing these concerns in ways that are mutually satisfactory to you and the Enterprises is critical to ensuring that there is liquidity in the housing finance market and to providing access to credit for borrowers.
We know that the Representation and Warranty Framework did not provide enough clarity to enable lenders to understand when Fannie Mae or Freddie Mac would exercise their remedy to require repurchase of a loan. And, we know that this issue has contributed to lenders imposing credit overlays that drive up the cost of lending and also restrict lending to borrowers with less than perfect credit scores or with less conventional financial situations.
To address this problem, FHFA and the Enterprises 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. These revisions are consistent with our broader efforts to place more emphasis on upfront quality control reviews and other risk management practices that provide feedback on the quality of loans delivered to the Enterprises earlier in the process.
The first improvements to the Framework went into effect in January of 2013. These improvements relieved lenders of representation and warranties obligations related to the underwriting of the borrower, the property or the project for loans that had clean payment histories for 36 months. In May of this year, FHFA and the Enterprises announced additional refinements to provide greater clarity around this 36-month benchmark. These changes included:
- Revising the payment history requirement to allow up to two 30-day delinquencies in the first 36 months after acquisition;
- Providing loan level confirmations when mortgages meet the 36-month performance benchmark or pass a quality control review; and
- Eliminating automatic repurchases when a loan’s primary mortgage insurance is rescinded.
As I committed FHFA to do when I announced these refinements in May, we have continued to engage in an ongoing process to address the issue of life-of-loan exclusions. Life-of-loan exclusions are designed to protect Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) from instances of fraud or other significant noncompliance, and, as a result, they allow the Enterprises to require lenders to repurchase loans at any point during the term of the loan. 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.
So, we have continued to address this issue, and I can report that we have reached an agreement in principle on how to clarify and define the life-of-loan exclusions. These changes are a significant step forward that will result in a better Representation and Warranty Framework and facilitate market liquidity without compromising the safety and soundness of the Enterprises.
First, we are more clearly defining the life-of-loan exclusions, so lenders will know what they are and when they apply to loans that have otherwise obtained repurchase relief. These exclusions fall into six categories: 1) misrepresentations, misstatements and omissions; 2) data inaccuracies; 3) charter compliance issues; 4) first-lien priority and title matters; 5) legal compliance violations; and 6) unacceptable mortgage products.
Second, for loans that have already earned repurchase relief, we are clarifying that only life-of-loan exclusions can trigger a repurchase under the Framework. This is a straightforward clarification, but one that we believe will reduce confusion and risks to lenders.
The Enterprises will provide details about the updated definitions for each life-of-loan exclusion in the coming weeks, but let me spend a minute highlighting some aspects of the refined definitions for the first two categories – misrepresentations and data inaccuracies.
In defining both of these categories, we are setting 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.
We are also adding a “significance” requirement to the misrepresentation and data