Freddie Mac is one-upping Fannie Mae by offering to retain some home loans that have defects but without requiring that mortgage lenders pay a fee.
Both Freddie and Fannie are expected to provide more guidance to mortgage lenders in 2016 about their so-called repurchase alternatives, which give lenders options for resolving loans that are sold to Fannie and Freddie but are at risk of being returned to lenders because they don't meet the government-sponsored enterprises' guidelines.
Loans can be considered defective if they are missing a critical piece of information, such as proper documentation of a borrower's income or an updated credit report. Often a lender can cure such defects.
Both GSEs have said that they are willing to retain loans in which the defects can be worked out. Fannie has told lenders that it may charge a risk fee of between 2% to 4% of the unpaid principal balance of the loan. Freddie has determined it will not charge a fee for defects that are considered minor or technical in nature.
"Underwriting is judgment and science and we're taking into account compensating factors and weighing [them] against the value of a defect," said Christopher Mock, Freddie's vice president of quality control. "We didn't feel the need to charge a fee."
Still, while the GSEs are extending major olive branches to lenders, repurchases overall are on the wane.
Part of the reason is that lenders have already repurchased millions of shoddy loans originated from 2005 to 2009. The GSEs also implemented a loan quality framework in 2012 to improve the overall quality of loans mortgage lenders are selling to them.
Of the 1.4 million loans Freddie has retained through early December, only 768 loans were repurchased by mortgage lenders. Freddie issued 4,000 total repurchase requests but after appeals and remedies, 81% of the repurchase requests were rescinded, Mock said.
"Every year there are fewer and fewer repurchases," he added.
Beginning next year, Freddie will notify lenders electronically through its quality control web portal how it is categorizing loans and which require a correction or a remedy, Mock said.
Freddie will categorize defects in one of three ways. Those listed as "findings," are generally considered "foot faults," and will not require a correction or remedy by the lender. Loans tagged as "price-adjusted loans," will require the lender pay a delivery fee that should have been paid when the loan was first delivered to Freddie. Finally, loans listed as having "significant defects" will require either a repurchase or Freddie may offer an alternative and still retain the loan.
"Our approach to quality control is a little bit different than [Fannie's]," Mock said. "If we get a loan that has a couple of foot faults, we're letting lenders know that they don't always rise to the level of a repurchase."
When a loan is found to be defective, Freddie typically will identify the problem and discuss it with the lender so they can fix their process "so the issues don't occur in the future," Mock said.
The push to improve loan quality was spearheaded by the Federal Housing Finance Agency, which oversees Fannie and Freddie. The GSEs created their "representation and warranty" frameworks in 2012 then revised them in 2014 and 2015 to provide more clarity to lenders and help reduce the risk of buybacks.