Fannie Buyback Relief On the Horizon
When I got in this morning and perused the headlines for what I thought you most need to know, the one that caught my eye may not sound like that big a deal, but it could be. Some industry journals, including the American Banker, are reporting that Fannie Mae is planning to offer financial institutions that sell it mortgages greater relief from loan repurchases.
Fannie Mae and its GSE brother Freddie Mac purchase loans from credit unions and banks. Under the standard purchase contracts, mortgage sellers make a series of representations and warrantees about the quality of the loan and its underwriting. As I explained in a previous blog, no one cared much about these representations and warrantees when the mortgage market was flying high. But once the foreclosure crisis started, many lenders realized for the first time that they had signed off on a “heads, I win; tails, you lose” arrangement in which the GSEs would retroactively scour loan files and use an underwriting oversight to force lenders to buy back mortgages that had long ago been taken off their books.
In theory, the system makes sense because a financial institution’s failure to live up to its side of the bargain led to the purchase of the mortgage loans for which the American taxpayer is ultimately on the hook. In practice, Fannie and Freddie’s aggressive use of this power resulted not only in poorly underwritten loans being repurchased, but also loans for which the alleged defect had no material impact on the loan going into foreclosure.
Since 2012 both Fannie and Freddie have taken steps to address this issue by, for example, being less likely to mandate repurchases for loans that go delinquent after three years. Nevertheless, problems remain with the system. According to the American Banker, early next year Fannie will implement changes under which it will retain some home loans that have defects. In return, lenders would pay a “risk fee” of roughly 3-4 percent of the loan value. This sounds like a further step in the right direction, but we still won’t know how big a step until we see more of the specifics.
McWatters Proposes Appeal Reform
NCUA’s resident gadfly, bomb-thrower extraordinaire, board member J. Mark McWatters is at it again. He used his column in the December issue of NCUA’s publication to call on NCUA to develop an independent appeals process for credit unions to use when they disagree with examiner findings. This is an issue worthy of its own blog, but I couldn’t help but mention it today. In the meantime, here is a link to a CU Times article on his proposal.