Executives from two government-sponsored enterprises acknowledged lender gripes about loan putbacks at the Mortgage Bankers Association’s secondary market conference on Tuesday while standing firm on how they’ve been handling them.
“It’s a mutual responsibility of the industry to manage our risk,” said Kevin Kauffman, Freddie Mac’s senior vice president of customer engagement, when asked about the repurchases the GSEs direct a lender to absorb in some cases when they discover origination defects.
Some lenders have asked whether Fannie and Freddie could cut them on a break on all performing loans with flaws and allow them to indemnify the mortgages instead of potentially absorbing a loss due to the need to sell mortgages at discounts in the scratch-and-dent market.
The GSEs already do offer indemnification in some circumstances, usually when the defect is considered lower on the scale of materiality drawn up in past industry negotiations.
Higher rates have prevented using the preferred way of resolving a defect, by reselling the loan the current coupon, and lenders have had to take deeper losses on repurchases as a result.
Fannie and Freddie can’t simply agree to absorb loan defect risk because they need to protect their finances so that they can fulfill their roles to support the broader market in tough times, executives said.
The high number of loans with repurchase risk is unlikely to be a constant, said Devang Doshi, SVP of capital markets at Fannie Mae, noting that the more the pandemic-era origination boom that was driven by low rates recedes, “the less this is going to be a problem for you as a lender.”
But so long as the market is purchase-oriented, repurchase risk may remain somewhat elevated per loan. A recent analysis of loan defect rates in 2020 and 2021 by Freddie Mac found that on average purchase mortgages had a 36% higher incident of defects.
Kauffman noted that Freddie is working to find ways to reduce defect risk through technology, examples of which include digital verifications of data such as will be available through its new automated income assessment tool.
Freddie and Fannie have introduced a growing set of digital validation tools over the years and sometimes provide representation and warranty relief for certain loan data.
One study found mortgages Freddie Mac purchased without the use of data validation tools have an average defect rate of 9.6%, compared to 2.3% to 8.5% for those processed using them.
Also during the panel, the GSEs provided updates on their efforts to reduce the stubbornly wide racial homeownership gap using new methods aimed at serving a broader range of borrowers.
Kauffman said Freddie has estimated that assessing alternative credit data like rent payment history in loan purchase decisions and using other types of analysis like using trended data could result in 17,000 additional Black and Latino borrowers qualifying per year.
Fannie’s positive rent payment program has helped 10,000 borrowers establish credit, Doshi said.
Both Freddie and Fannie have recently established special purpose credit programs and also are working with lenders that have their own SPCPs, the two executives noted.
