FHFA amends GSEs’ repurchase policies to accommodate COVID-19 forbearances

Fannie and Freddie to extend natural disaster-related legal policies to loans affected by pandemic

Fannie Mae and Freddie Mac are extending their representation and warranty policies for loans affected natural disasters to also cover mortgages that have successfully exited a forbearance plan initiated by the COVID-19 pandemic.

Loans eligible for repurchase relief three years after origination now won’t lose that eligibility due to a COVID-related forbearance. Essentially, missed payments during a COVID-related forbearance won’t make a loan automatically lose its representation and warranty relief.

The shift was announced by Sandra L. Thompson, director of the Federal Housing Finance Agency (FHFA), at the Mortgage Bankers Association’s (MBA) Annual Convention and Expo in Philadelphia. Repurchases of loans sold to the government-sponsored enterprises (GSEs) have been a hot-button topic of late, as repurchase rates have been climbing and lenders have been forced to reabsorb costs when the GSEs find underwriting defects after taking on the loan. For many lenders — especially small, independent companies — the extra expense can be brutal, and it has led many to join a growing chorus this year for repurchase policy changes.

Thompson addressed the escalation in repurchase concerns in a speech at MBA Annual. She acceded that there has been a recent increase in the number of repurchase requests, although that’s to be expected given multiple years of record-high loan volume during and after the pandemic. The good news, she said, is that repurchase requests from Fannie and Freddie have actually declined since peaking in early 2022.

“We know that a key factor contributing to the severity of this issue is today’s higher interest rate environment, in which the losses associated with repurchasing low interest rate loans can be quite steep,” Thompson said. “We have also heard the industry’s concerns regarding loan defects that may not rise to the materiality necessary to justify a repurchase. … We also know that there continue to be concerns regarding the rep and warrant treatment of loans where the borrower obtained a COVID-19 forbearance plan.”

Thompson praised the agility of the industry in adopting an increased focus on loss mitigation to keep Americans in their homes during the depths of the pandemic. She lauded the servicers “at the center of these efforts, offering relief and long-term solutions at the direction of policymakers.”

Scott Olson, executive director of the Community Home Lenders of America (CHLA), applauded the move. Olson, who has been vocal for months about the need for GSE repurchase reform, pressed the FHFA for a change in repurchase policy in May.

“CHLA commends FHFA Director Thompson for her comments today about FHFA’s focus on the need for balanced Fannie/Freddie repurchase policies — and for extending rep and warrant policies for COVID forbearance loans,” Olson said. “More balance in repurchase demands is needed to reduce disincentives for lenders to originate mortgage loans to underserved borrowers. 

“It is also necessary to avoid steep and unnecessary losses lenders are experiencing from selling off performing loans in a market with skyrocketing mortgage rates.”

MBA president and CEO Bob Broeksmit also commended the FHFA for taking action.

“MBA has advocated strongly for FHFA to address the GSEs’ increased incidence of loan repurchase requests — especially for performing loans and those with relatively minor issues underwritten during the pandemic,” he said.

“We share FHFA and the GSEs’ goal of high-quality underwriting and will continue to work with them to ensure the rep and warranty framework is being applied in a balanced way, and that there are appropriate alternatives that lead to outcomes short of a repurchase request. FHFA’s policy change to provide rep and warrant relief for performing seasoned loans that have successfully exited COVID-19 forbearance plans is a longstanding recommendation that we are pleased to see implemented.”


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