Higher Degree of Certainty and Clarity?

The Federal Housing Finance Agency, the regulator of Fannie Mae and Freddie Mac, released a statement yesterday saying it was working with those two entities, which are the nation’s major government-backed mortgage securities investors, to “provide lenders a higher degree of certainty and clarity around repurchase exposure and liability as well as consistency around repurchase timelines, incentives and remedies.”

The FHFA is also standardizing the data Fannie Mae and Freddie Mac collect on each loan so that they have more information when buying mortgages from lenders. Banks are currently requiring credit scores on government-backed loans that are between 100-200 points higher than the minimums set by Fannie Mae, Freddie Mac and the Federal Housing Administration, after the government-controlled agencies demanded that lenders repurchase more than $80 billion in flawed loans over the past three years.

PNC Financial Services Group Inc. said on June 12 that it is increasing reserves ten-fold, to $350 million, to cover demands, while Bank of America Corp., the second-biggest U.S. lender, said in May that it will buy back $330 million of home loans from Freddie Mac. Bank of America’s purchase of subprime lender Countrywide Financial in 2008 has exposed it to a particularly substantial number of buy-back demands.

More Questions Than Answers

The FHFA’s statement is somewhat cryptic, leaving many important questions unanswered — for example, would this potential change affect only new loans, or would it apply to “legacy” loans as well? Would this development lead to a significant number of pending buy-back demands being rescinded? It is also unclear if any reform efforts will be directed solely for the benefit of the “Too Big To Fail” banks, or whether they will directly benefit smaller sellers of loans to the GSEs.

For now, however, the statement may perhaps best be understood as an overdue acknowledgment that far too many buy-back demands in recent years have been unrealistic. There has been a lot of revisionist history when claims are made that, for example, the party purchasing the loan would never have bought the loan had it only known that there might have been an inaccuracy in the loan application file. We have also seen an onslaught of hyper-technical “breach” claims that have nothing to do with why the loan went into default.

Lest anyone feel too sorry for the biggest banks, however, they are some of the very worst offenders when it comes to pursuing specious buy-back claims — and it’s not always at all clear that they have even received buy-back demands from Fannie or Freddie (or anyone else) related to the loans on which they are demanding “repurchase.” It is likewise not clear, all too often, that the big banks have in their possession a loan that could even be “repurchased” by a correspondent lender. In short, it is unclear whether the FHFA’s statement, even if it actually leads to relief from claims by Fannie and Freddie against the big banks, will in turn lead to fewer buy-back demands by the big banks against the smaller prey from which they acquired many of these same loans in the first place.

Bottom Line:

If specific reforms are indeed announced, mortgage loan originators should insist, at a minimum, that both their current agreements and any new contracts with their aggregators contain buy-back related terms that are no more onerous than those that result from the reformed GSE policies.