They are as follows:
- Price-Adjusted Loans
- Significant Defects
The stated intent of this change in Defect Taxonomy is to refine their representations and warranties framework by providing clarity and transparency regarding origination defects and remedies.
Definitions for each of these defect categories were provided as follows:
- Findings – one or more defects that, when considered with other loan features, does not necessitate a change in the price of the loan or result in the loan being unacceptable even if the true and accurate facts about the loan had been known at the time Fannie Mae or Freddie Mac acquired, purchased or securitized the loan.
- Price-Adjusted Loan (PAL) – One or more defects that, when considered with other loan features and based on the facts of the loan as purchased or securitized by Fannie Mae or delivered to Freddie Mac, result in a loan that was otherwise eligible for delivery to the GSE had the correct data been delivered and the LLPA or delivery fee been paid to the GSE.
- Significant Defect – one or more defects that either necessitate a change to the price at which the loan was acquired or result in the loan being unacceptable for purchase had the true and accurate information about the loan been known at the time of purchase. Loans with Findings and PAL’s are not loans with significant defects.
The joint Announcements also outline several repurchase alternatives based on whether or not the identified loan is performing or non-performing. The end result will enable lenders to manage risk more effectively.
The Announcements made by both Fannie Mae & Freddie Mac stated that these changes were being implemented “at the direction of the Federal Housing Finance Agency”.
So there you have it – a whole new Defect Taxonomy that the mortgage industry will need to adjust to in the coming months. Not to be left out, HUD/FHA also recently announced a substantially revised Defect Taxonomy that they intend to implement (no time frame was provided) that would replace their current Rating System of Conforming, Deficient and Unacceptable with a Four Tier rating process which would capture greater detail on the scope of each defect.
Although, the way we will categorize and define loan origination defects in the future will be changing – the more important objective should be for lenders to drill down on the cause for each defined defect and to take appropriate steps to reduce or eliminate them going forward.
As the Ford Motor Company advertising campaign from a few years ago states “Quality is job one”. Will this new Defect Taxonomy ultimately result in better quality loans – stay tuned!