Among the new policy updates announced by the Federal Housing Finance Agency (FHFA) at the 2024 Mortgage Bankers Association (MBA) Annual Convention and Expo in Denver was the expansion of a Freddie Mac pilot program offering lenders a fee-based alternative to repurchase requests.
Loan repurchase requests from the government-sponsored enterprises (GSEs) — a constant headache for mortgage companies — occur because loans acquired by Fannie Mae and Freddie Mac are found to have significant underwriting defects during quality control reviews. Such buybacks can be costly, especially for small and independent lenders.
Earlier this year, Freddie piloted an alternative to the repurchase program: Instead of making lenders repurchase defective but performing loans within the first 36 months of origination, the GSE instituted a fee-based structure that incentivizes originating high-performance loans. Participating lenders with a non-acceptable quality (NAQ) rate under a certain threshold, for example, weren’t subject to buyback requests on most performing loans. Those with higher defect rates, on the other hand, were subject to fees based on a sliding scale determined by their NAQ.
With the new expansion, approved lenders will have the option to join the program on an annual basis. Under the expanded pilot’s fee structure, lenders with an NAQ above 2% will be charged a fee in a step-up approach based on the unpaid principal balance of loans delivered for the quarter. Fees will only be assessed to lenders who deliver enough loan volume to generate “statistically significant sampling,” according to a statement from Freddie Mac; small lenders that do not have a statistically significant NAQ rate will have their fees waived.
Under the new plan, Freddie said that lenders won’t be required to buy back most loans with significant defects as long as they are performing. Loans that default within the relief period will still be subject to buybacks.
Naa Awaa Tagoe, deputy director of the FHFA, touted the pilot expansion as the next step in the agency’s work in addressing concerns from lenders about elevated repurchase levels.
“[The original pilot earlier this year] was met with enthusiasm from industry stakeholders, and the early results have been promising. Freddie Mac reported greater levels of lender engagement in the quality control process. The pilot also reduced lender repurchase costs for performing loans with defects,” she said.
“The broader availability of this fee-based repurchase alternative will allow Freddie Mac to better incentivize high-quality underwriting and ensure appropriate remedies for performing loans with defects,” Tagoe added.
The expansion is slated to start in the first quarter of 2025. For lenders who opt out of joining the expanded pilot, Freddie will begin offering a fee-only remedy for eligible loans.
The announcement was met with enthusiasm by industry stakeholders, many of whom worked with the FHFA on the pilot and offered feedback about the program.
“MBA has been a leading industry voice in seeking effective alternatives to loan repurchase requests and appreciates the ongoing, constructive engagement with FHFA, Fannie Mae and Freddie Mac over the past few years,” said Bob Broeksmit, president and CEO of the MBA. “Expanding Freddie Mac’s pilot program is another important step toward encouraging high-quality underwriting and eliminating performing loan repurchases.”
“CHLA greatly appreciates the expansion of this repurchase alternative pilot for performing loans,” said Scott Olson, executive director of the Community Home Lenders of America (CHLA). “We continue to support this program and its mission to provide balance in a challenging housing environment for lenders and borrowers by improving loan quality and ensuring borrowers, particularly underserved, are able to stay in their homes.”