“Quality Loans with some Defects” Alternatives to Repurchases being considered by the GSE’s

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Both Fannie Mae and Freddie Mac reported in December that they are considering offering lenders alternatives to repurchase requests for loans that have documented defects but are still considered to be of good quality.

I enjoy a good oxymoron. These are some of my favorites: “jumbo shrimp”, “serious joke”, “virtual reality”, “small crowd”, “random order”, “student teacher” and “act naturally”.

Now, thanks to the GSE’s recent announcements, I guess that I will have to add “defective quality loan” to this listing.

Under Fannie Mae’s proposed alternative, lenders would pay a risk fee of approximately 2-4% of the loan amount on loan transactions that have documented defects. However, the loan itself is still expected to perform well over the term of the mortgage.  This would be much more cost-effective for a lender than a full repurchase request.

Not to be outdone, Freddie Mac stated that they are inclined not to charge a fee to a lender if they conclude that sufficient compensating factors are evident and the defects observed are considered to be minor.

Of course, the devil is in the details. It is anticipated that both Fannie Mae and Freddie Mac will provide more specific examples of what they consider to be minor defects thus enabling the GSEs to offer these repurchase alternatives on such cases.

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In my opinion, this is a “win – win” situation for mortgage lenders, especially smaller firms.

Instead of facing stiff monetary penalties for making underwriting errors or omissions, lenders will continue to receive valuable feedback from the GSEs on the results of their post-closing technical reviews. They will also be subjected to a small (if any) “risk fee” if it is determined that a particular defect is minor.

That being said, I would caution any lender that consistently makes these types of errors and does not take appropriate steps to determine the root cause(s) of such defects and initiate corrective actions.  In doing so, the overall quality of loans should improve going forward.

Keep reading our LoanLogics blog posts and newsletters for additional information on this topic and related topics in the coming weeks.

About the Author

Gerry Glavey

Gerard (Gerry) Glavey is Senior Vice President / Chief Credit Officer for LoanLogics. Gerry has decades of experience working in residential mortgage credit and compliance and brings insights that few in the industry can match. In his role, he develops new services and provides support for all post close quality control and quality assurance, pre-close quality control, due diligence services, and document processing services. He spent 37 years with the US Department of Housing and Urban Development, where most recently he was the Director, Processing and Underwriting Division for the Home Ownership Center (HOC) in Philadelphia. In this capacity, Mr. Glavey was responsible for the administration of all HUD/FHA Single Family Loan Origination activities, including underwriting, appraisal and endorsement for the 16 state jurisdiction of this HOC.