Lack of Certainty Facing Lenders
Last week, the Federal Housing Finance Agency (FHFA) announced a new “representation and warranty framework” for conventional loans sold or delivered to Fannie and Freddie after January 1, 2013. In a clear acknowledgment of the lack of certainty facing lenders in this era of rampant repurchase demands, the agency’s announcement sought to clarify lenders’ future exposure to potential repurchase liabilities.
Two key components of the new guidelines are that:
- Lenders will be relieved from repurchase exposure if the loan sold or delivered meets certain performance thresholds (such as if the borrower made three years of consecutive, on-time payments), and
- Exclusions from representation and warranty-related liability will subsequently be detailed for violations of unrelated defaults.
Banks Spurred to Increase Lending
The FHFA evidently is intent on spurring big banks to increase their mortgage lending activity, rather than withholding funds from prospective borrowers for fear of being subjected to additional future repurchase and indemnification liability.
Of course, the GSEs‘ demands to date upon the big banks have merely been a prelude to demands by those same big banks that third-party loan originators pay the big banks “repurchase” or “indemnification” amounts — regardless of whether the banks actually acquiesced to the GSEs’ demands on them (or should have acquiesced without a spirited fight), and regardless of the fact that the GSEs’ demands relate specifically to alleged breaches of contracts between the big banks and the GSEs.
This new framework unfortunately does not officially apply to “legacy” loans sold to the GSEs in recent years, or even to loans that will be sold before year-end 2012. We hope nonetheless that the FHFA’s tacit acknowledgment that many types of alleged origination-related “defects” have nothing to do with loan performance will be instructive to courts.
The purported breach of a rep or warranty is, for example, likely not the true reason for a default — or a GSE’s supposed “loss” on the loan — when a borrower made consistent and timely payments before losing her job.
By pretending otherwise, the big banks and the GSEs have vastly expanded the universe of put-back demands for some time now, at great cost to correspondents, and with little regard for elementary logic, let alone causal analysis.