Fannie Mae and Freddie Mac have started to electronically validate all loans they purchase in order to better flag defective ones and to better assess risk when banks sell mortgages to the two government-sponsored enterprises, National Mortgage News reported Sept. 18.
Steve Spies, vice president of loan quality and lender assessment at Fannie, said the GSE’s new expectation is “zero defects.”
Previously, the GSEs only reviewed a sample of the loans and only after they defaulted. Now they will review all loans within 120 days of purchase and grade lenders on underwriting, quality control and governance; should banks sell GSEs defective loans, they immediately will be forced to repurchase them.
Fannie and Freddie reported that most underwriting defects are related to lenders failing to obtain copies of all necessary paperwork for supporting loan decisions; with rising interest rates, the GSEs worry that banks have begun loosening standards.
"As rates go up, the credit box will try to be expanded, corners will be cut and that's when we will be on the front lines," Chris Mock, Freddie's vice president of quality control, told National Mortgage News.
Fannie and Freddie also have begun reviewing 10 percent of all loans where quality control processes have been outsourced. National Mortgage News reported that Fannie currently has 500 employees working on ensuring lender compliance, and Freddie has 250.
The tougher standards should benefit banks, as well. One component of the new guidelines is that lenders don’t have to repurchase a failed loan as long as it performs for three years, and loans refinanced through the Home Affordable Refinance Program are relieved of repurchase requirements after only a year of consecutive on-time payments.
Becky Walzak, president of Walzak Consulting in Deerfield Beach, Fla., told National Mortgage News that it won’t be easy for banks to keep up with the new standards.
“They want lenders inspecting every single loan and sending it back if it's not right, and that is so extremely expensive, lenders cannot afford to do that,” she told National Mortgage News. “They want more people looking at compliance and loan quality, so now we have this subpopulation of people at these lenders checking the checkers and paying for it. That's why the cost of a loan will go up.”
Fannie and Freddie argue, however, that the new standards are necessary to avoid another housing bust. Since 2008, banks have had to repurchase thousands of defaulted and non-performing loans, and the Federal Housing Finance Agency has launched 18 lawsuits against banks for misrepresenting loan quality.