A New Approach to Fostering Mortgage Quality
Changes are afoot in the world of conforming, conventional mortgages. Under the Federal Housing Finance Agency’s (FHFA) direction, we’re changing our traditional approach to the “representations and warranties” lenders make that the loans they sell us comply with our Seller/Servicer Guide and business terms. Historically, these reps and warranties last for the life of the loan and are an important incentive for delivering quality mortgages to Freddie Mac. That’s because rep and warranty violations can lead to a wide range of actions, from one-on-one discussions with lenders about improving their business processes to repurchase requests.
Starting next year, under FHFA’s direction, Freddie Mac will relieve lenders from certain reps and warranties involving the underwriting of borrower credit and the property securing the mortgage, if there are no delinquencies during the first 36 months and other quality performance milestones are met. In the case of Freddie Mac’s Relief Refinance Mortgages, which includes Home Affordable Refinance Program (HARP) mortgages, rep and warranty relief can occur after just 12 months of consecutive, on-time mortgage payments. The new policy will apply to all single family mortgages sold to Freddie Mac on or after January 1, 2013. (For details of our new Representation and Warranty Framework, click here.)
This new approach to fostering loan quality builds on a number of data-gathering tools Freddie Mac implemented that are opening the door to new ways of doing business. Chief among these is the Uniform Mortgage Data Program (UMDP), a project undertaken by both Freddie Mac and Fannie Mae at the direction of FHFA, to standardize loan and appraisal data definitions and delivery requirements. The UMDP can help lenders detect and correct loan eligibility issues before loans are sold, as well as help us sharpen our focus on the quality of mortgages we buy.
The combination of enhanced mortgage data quality coupled with effective quality control reviews should give lenders more transparency, predictability, and confidence in the mortgages they deliver while enabling us to sustain our commitment to quality underwriting and risk management more efficiently.
This change is part of a larger effort to better align a number of Freddie Mac and Fannie Mae business policies and practices. Called seller/servicer contract harmonization, its goal is to give lenders a higher degree of certainty and clarity when selling and servicing conforming, conventional mortgages.
Going forward, seller/servicer contract harmonization is intended to better align Freddie Mac and Fannie Mae policies involving the delivery of quality loans, lender performance, remedies for breaches of contract or performance issues, and other requirements. At the same time, this effort will not affect Freddie Mac’s own ability to foster new homeownership opportunities in a changing marketplace by setting prudent underwriting standards, pricing, and appetites for risk. (For more information, see FHFA’s announcement .)
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