New Representation and Warranty Framework Introduced in Guide Bulletin 2012-18
September 11, 2012
Today we are announcing a new framework for the representations and warranties that have long been a cornerstone of doing business with Freddie Mac. While the requirement to represent and warrant that the mortgages you sell to us meet our purchase eligibility and sale requirements remains the same, the framework for how we exercise remedies for breaches of certain selling representations and warranties is changing. This new framework, which will apply to future deliveries, is the result of collaborative work between Freddie Mac and Fannie Mae (the Enterprises) at the direction of the Federal Housing Finance Agency (FHFA).
Under the new framework, announced in today's Single-Family Seller/Servicer Guide (Guide) Bulletin 2012-18, Freddie Mac will not exercise its remedies in connection with breaches of certain selling representations and warranties if specific requirements are met. This will help address your concerns around loan repurchase risk to ultimately achieve more certainty and transparency when selling mortgages to us in the future.
Originate & Underwrite and Sell & Deliver
Achieving an acceptable borrower payment history is a key component of the new representation and warranty framework. If the mortgage and borrower performance meet certain eligibility requirements, we will not exercise repurchase remedies on these mortgages. As a Seller, this means that for an eligible mortgage, once the borrower meets the applicable payment history requirement by paying on time for the applicable time period, as noted below, you will not be required to repurchase the mortgage based on breaches of certain selling representations and warranties.
The new framework is effective only for Freddie Mac settlements on or after January 1, 2013.
- Key Eligibility Requirements: We will not exercise our remedies for breaches of certain representation and warranty requirements related to underwriting the borrower, the property, and the project in which the property is located under certain conditions where the mortgage has an acceptable payment history. A mortgage has an acceptable payment history if one of the following requirements are met:
- For mortgages other than Freddie Mac Relief Refinance MortgagesSM, the borrower has no 30-day or greater delinquencies in the first 36 months following the Freddie Mac settlement date.
- For Relief Refinance Mortgages, the borrower has no 30-day or greater delinquencies in the first 12 months following the Freddie Mac settlement date.
- For any mortgage, the borrower has no more than two 30-day delinquencies and no 60-day or greater delinquencies in the first 36 months, following the Freddie Mac settlement date, and the payment is current on the 60th month.
- Key Exclusions: Even if a mortgage has an acceptable borrower payment history and meets the other eligibility requirements under the new framework, the mortgage will be subject to enforcement of our remedies if there are representation and warranty violations related to the Freddie Mac Charter, certain misstatements, misrepresentations and omissions, certain data inaccuracies, compliance with laws, first lien priority, and mortgage product eligibility. Read more about these exclusions in our Single-Family News Center article.
- Automatic Repurchase Triggers: If no scheduled payments were made for the first three months after the Freddie Mac settlement date (i.e., the borrower is 90 days delinquent) the loan will be subject to a repurchase request. Seller/Servicers may appeal such a repurchase request.
In adopting the new representation and warranty framework, it is important to note that:
- We are not changing the representation and warranty requirements currently in effect. Instead, we are modifying our enforcement if certain conditions are met.
- You will continue to be responsible for underwriting and delivering investment-quality mortgages according to the requirements of your Purchase Documents and will have life of loan responsibility for certain key areas.
- Once a mortgage meets the eligibility requirements, its eligibility for the new framework is final and irrevocable subject to the life of loan exclusions, unless otherwise agreed to by Freddie Mac and the Seller/Servicer.
You will find a more detailed description of these requirements in today's Bulletin and in the new Guide Section 6.14, Enforcement of representations and warranties related to underwriting of the Borrower, Mortgaged Premises and project.
Industry Letter on Quality Control Principles
Following the operating principles of our quality control (QC) processes and delivering quality mortgages will be fundamental to your ability to be relieved from enforcement of our remedies for certain selling representation and warranty responsibilities. Today, we also issued an Industry Letter to remind you of our QC operating principles. The Industry Letter provides insights on our current QC processes and possible changes as a result of the new representation and warranty framework, including:
- Updated timeframes for file requests, repurchases, and appeals.
- New supporting documentation requirements.
- Future suite of remedy alternatives to repurchases.
At this time, we do not anticipate any material changes to our random sample process, although our performing loans targeted sample size may increase as a result of enhanced loan level data analysis.
It is important to note that if prior to the borrower meeting the required payment history we determine that a performing mortgage does not meet the requirements of your Purchase Documents, you will be notified whether the mortgage will require action on your part and/or will continue to be eligible for representation and warranty relief going forward.
Part of a Broader Series of Strategic Initiatives
This new representation and warranty framework is part of a series of strategic initiatives referenced by FHFA in their public announcements today as "Contract Harmonization." Our ability to support this new framework and the additional future initiatives referenced today by FHFA is built off the many foundational components that Freddie Mac Sellers have already implemented, including the Uniform Loan Delivery Dataset, and the Uniform Appraisal Dataset. In addition, we are continuing to develop technology to provide you and us with the tools to identify and correct loans not meeting our requirements prior to delivery to Freddie Mac, leveraging Loan Prospector® automated underwriting and other technology to offer more certainty for Freddie Mac Sellers in the future.
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