New Representation and Warranty Framework FAQs
For loans with Freddie Mac settlement dates on or after January 1, 2013, a new representation and warranty framework will be in effect. This new framework will provide more certainty and transparency for Freddie Mac Sellers by helping to address Seller concerns around loan repurchase risk.
The following Q&As provide supplement information about the new representation and warranty framework.
- What are seller representations and warranties?
- Why is there a focus on changing selling representations and warranties now?
- Is this change indicative of other changes to the current Freddie Mac and Fannie Mae business model?
- Will the new selling representation and warranty framework positively address industry and lender concerns around repurchase risk? Will it alleviate some of the challenges lenders face today with repurchases?
- Does this new framework impact repurchase remedies for servicing breaches of representations and warranties?
- Will borrowers benefit from this new framework?
- How does the new framework impact mortgage rates and origination costs?
- What are the effective dates?
- Why does the new selling representations and warranties framework eligibility require an acceptable payment history of 36 months following the acquisition date? Why not sooner?
- Do Fannie Mae’s Refi Plus/DU Refi Plus and Freddie Mac’s Relief Refinance Mortgages, which include HARP loans, fall under the new selling representation and warranty framework?
- Are loan modifications, including HAMP, included as well?
- How is the Quality Control (QC) process changing for Freddie Mac and Fannie Mae with this announcement?
- Where can I learn more about other changes to the QC process?
- When will the QC changes resulting from the new representation and warranty framework become effective?
- What is Contract Harmonization?
- Why is it called Contract Harmonization?
- When will we receive more information and details?
- How or what impact/effect will contract harmonization have on borrowers?
- How does Contract Harmonization support Fannie Mae and Freddie Macs' mandate to both protect taxpayer investment and assist borrowers in danger of default and foreclosure?
- How does contract harmonization relate to FHFA’s responsibilities as Conservator and safety and soundness regulator of Fannie Mae and Freddie Mac?
Seller representations and warranties provide the assurance to Freddie Mac and Fannie Mae that a mortgage sold to them complies in all respects with the standards outlined in Freddie Mac’s Purchase Documents and the Fannie Mae Selling Guide and Lender Contracts, including underwriting and documentation standards. If a mortgage is not compliant, Freddie Mac and Fannie Mae may exercise their respective remedies, including the issuance of a repurchase request.
We have listened to lenders and heard their concerns about the repurchase process. Addressing selling representations and warranties now is a natural next step in addressing FHFA’s Strategic Plan for conservatorships and Freddie Mac and Fannie Mae business goals. With an increased level of certainty, clarity, and transparency, lenders can be confident that the loans they deliver to Freddie Mac and Fannie Mae will not be subject to the enforcement of remedies for breaches of certain representations and warranties, as long as the mortgages meet an acceptable payment history and other eligibility requirements.
In adopting the new selling representation and warranty framework for future deliveries, it is important to note that we are not modifying the representations and warranties currently required. Sellers continue to be responsible for underwriting and delivering investment-quality mortgages according to the requirements of Freddie Mac’s Purchase Documents and Fannie Mae’s Selling Guide and Lender Contract.
Instead, the new framework will provide lenders with relief from Freddie Mac and Fannie Mae ’s enforcement of remedies for breaches of certain representations and warranties for new loan acquisitions commencing in 2013 that meet specific payment history requirements.
Under the guidance of FHFA, Freddie Mac and Fannie Mae are discussing a number of changes in the process for conducting quality control reviews. A preview of the changes to come is discussed in the Industry Letter and Lender Letter also released today.
Will the new selling representation and warranty framework positively address industry and lender concerns around repurchase risk? Will it alleviate some of the challenges lenders face today with repurchases?
Yes, with better data and improved loan quality, Freddie Mac and Fannie Mae have been working with FHFA to develop a framework that will provide lenders a consistent approach around repurchase exposure, repurchase timelines, and remedies.
With a common definition and clear up-front expectations, lenders should experience consistency when dealing with Freddie Mac and Fannie Mae. The fundamental responsibility of lenders to meet the contractual requirements for loan quality remains the same.
The new framework only impacts certain selling representations and warranties. However, Freddie Mac and Fannie Mae are working closely with FHFA to make changes that will provide more efficient standards for the servicing of Freddie Mac- and Fannie Mae-eligible mortgages. The goal is to work towards a common set of servicing performance metrics and breach remedies for performing loans, investor reporting, and management of non-performing loans, to be communicated at a future date.
The end goal of the new framework is enhanced transparency for lenders and other industry participants that translates to greater business efficiencies and improved access to mortgage financing.
Freddie Mac and Fannie Mae will not be assessing additional costs or fees to lenders as a result of the new framework. They do not control mortgage rates, origination costs, and fees that may be charged by lenders.
The new framework goes into effect for conventional loans funded, acquired, securitized, or guaranteed on or after January 1, 2013.
Among industry members consulted, there were various suggestions on the timing of the relief, the most prevalent being 36 months. Freddie Mac and Fannie Mae, in consultation with FHFA, concluded that 36 months would enable Freddie Mac and Fannie Mae to conduct sampling and analyses needed to confirm the eligibility of the mortgage loans acquired, and would show the borrower's ability to repay the loan according to its terms.
Yes, they do. All single family mortgage loans that meet the specified eligibility requirements are included in this new framework.
However, Freddie Mac’s Relief Refinance Mortgages for Same Servicers and Open Access and Fannie Mae’s Refi Plus/DU Refi Plus will be eligible for relief after an acceptable payment history of only 12 months following the acquisition date.
These streamline refinance programs are designed to assist borrowers who are current on their loans who may not have been able to refinance to obtain a lower payment, move to a more stable product, or shorten their terms to rebuild equity faster. Providing lenders with an eligibility for relief at the 12 month point should encourage lenders to participate even more fully in HARP and to reach more borrowers.
Since loan modifications are not new deliveries, they are not part of the new framework.
Currently, Freddie Mac and Fannie Mae select a statistically valid random sample of new loan deliveries, which is augmented by targeted sampling. Going forward, it is likely they will increase their targeted sampling as they employ a number of technology tools and internal models to identify loans that merit further scrutiny earlier in the review process. Because loans will be targeted earlier in the review process, lenders will also likely experience an increase in the number of performing loans that are selected for review. In addition, the quality and volume of mortgage loans delivered to Freddie Mac and Fannie Mae will directly impact the size of the targeted sampling. Lastly, each loan file that is selected will be reviewed on a comprehensive basis. Review our October 19, 2012, Industry Letter for more details on Freddie Mac’s QC and enforcement practices as well as how Seller/Servicers will be impacted by the new representation and warranty framework.
Changes to the QC time lines and enforcement processes in support of the new representation and warranty framework were announced in Guide Bulletin 2012-22.
The QC changes in the timelines for file requests, appeals and repurchase requests will be applied to mortgages sampled after January 1, 2013. The representation and warranty framework will become effective with loans settled after January 1, 2013.
Contract Harmonization is an effort by Freddie Mac and Fannie Mae, undertaken at the direction of FHFA, to generally align a set of common principles, standards, and requirements (and/or tools) for lender representations and warranties, the delivery of quality loans, contract breaches and remedies, servicing metrics, and overall customer performance management.
Contract Harmonization efforts aim to provide the industry with a higher degree of certainty and clarity for future acquisition of Freddie Mac- and Fannie Mae- eligible mortgages and servicing performance. It also seeks to lay a firm foundation for a new, sustainable housing finance system.
Contract Harmonization supports the 2012 Strategic Plan for the Conservatorships.
To achieve FHFA's goal of establishing clear and efficient standards, several key Freddie Mac and Fannie Mae requirements will be aligned through changes in their contracts with lenders.
The initial details on the new representation and warranty framework was released in the Single-Family Seller/Servicer Guide Bulletin 2012-18. Information can be found on FHFA’s, Freddie Mac’s and Fannie Mae’s websites. Contract Harmonization will be phased in over the next year. As new phases are completed, Freddie Mac and Fannie Mae will provide operational information to their customers.
One of FHFA's primary missions for Contract Harmonization is to make doing business with Freddie Mac and Fannie Mae more efficient, transparent, and predictable for lenders. This transparency should increase the certainty for lenders in dealing with Freddie Mac and Fannie Mae. As a result, it may help some lenders make their own operations more efficient so they can compete more successfully for borrowers and improve access to mortgage financing.
Contract Harmonization will help strengthen the nation’s housing market by making key Freddie Mac and Fannie Mae business operations more transparent, consistent, and efficient for lenders. A stronger market will naturally help protect the taxpayers’ investment in both Freddie Mac and Fannie Mae.
Contract Harmonization will generally align the way Freddie Mac and Fannie Mae measure how well servicers help delinquent borrowers avoid foreclosure and keep their homes. This is intended to help servicers dedicate their resources more efficiently to this critical objective.
The new framework encourages better quality loan originations and underwriting, along with consistent quality control, which will help maintain liquidity in the mortgage market – a key component of FHFA’s Strategic Plan for the Conservatorships. It also protects Freddie Mac and Fannie Mae and taxpayers from the credit risk of loans not underwritten to prescribed standards. These efforts along with other programs under the Contract Harmonization umbrella, contribute to a firm foundation for a new, sustainable housing finance system for the future.