Fannie Mae Selling Guide Announcement SEL-2015-11: Selling Representations and Warranties Framework ? Origination Defects and Remedies
October 7, 2015
Fannie Mae, jointly with Freddie Mac, and at the direction of the Federal Housing Finance Agency (FHFA), is announcing the origination defects and remedies framework (the “remedies framework”) which expands upon provisions contained in the representations and warranties framework introduced in Selling Guide Announcement SEL-2012-08, New Lender Selling Representations and Warranties Framework, and subsequently updated in Announcements SEL-2014-05, Lender Selling Representations and Warranties Framework Updates and SEL-2014-14, Lender Selling Representations and Warranties Framework Updates.
The remedies framework is specifically related to corrections of identified origination defects, and available repurchase alternatives. This framework provides clarity on the process followed in categorizing origination defects, lender corrections of such defects, and available remedies. In addition, it provides more transparency regarding Fannie Mae’s discretion on loan-level decisions when reviewing a loan during a quality control review. The remedies framework does not affect any servicing duties, responsibilities, or obligations.
In adopting and clarifying the origination remedies framework, lenders remain responsible for underwriting and delivering investment quality mortgage loans in accordance with the terms of the Lender Contract.
The remedies framework is effective for whole loans purchased, and mortgage loans delivered into MBS with pool issue dates, on and after January 1, 2016.
While the mortgage industry has undergone significant changes in the last few years, selling representations and warranties continue to remain important, by promoting liquidity and providing the necessary assurances that allow Fannie Mae to purchase mortgage loans in an efficient and responsible manner without reviewing each loan individually prior to its purchase or securitization. They also provide Fannie Mae with remedies to address situations where a lender’s obligations to meet the requirements of the Lender Contract have not been met.
Over the last several years, Fannie Mae and Freddie Mac, at the direction of FHFA, have worked to refine the representations and warranties framework. As part of this process, all parties have listened closely to lender concerns about the impact that loan repurchases have had on mortgage lending, and understand the need to address these concerns in ways that are mutually satisfactory. The result will ensure there is liquidity in the housing finance market and provide access to credit for borrowers. Through the introduction of the remedies framework, Fannie Mae and Freddie Mac are working to provide clarity and transparency regarding origination defects and remedies, and expect these changes will enable lenders to manage risk more effectively.
After completing a full-file quality control review, Fannie Mae will categorize defects in one of three ways:
- price-adjusted loans, and
- significant defects.
Mortgage loans with defects categorized as “findings” will not require a correction or a remedy from the lender. Loans categorized as “price-adjusted loans” require the lender to pay the applicable loan-level price adjustment
fee (LLPA) that should have been paid to Fannie Mae when the loan was purchased or securitized by Fannie Mae. If a loan has one or more defects categorized as a “significant defect,” Fannie Mae will require the
repurchase of the loan, or may offer the lender a repurchase alternative.
At any time during the appeals process, the lender will have the right to correct any significant defect in the specified time frame and in the manner required by the Lender Contract. If the significant defect is corrected in accordance with the terms of the Lender Contract, Fannie Mae will rescind or close-out (as applicable) the related remedy request.
As a reminder, the scope of full-file quality control reviews under the remedies framework remains the same for performing loans and non-performing loans.
Source: Fannie Mae ( Selling Guide Announcement SEL-2015-11 full version)