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Fannie Mae (and other GSEs) have been very aggressive in the last 2 years or so in making demands upon banks, credit unions and other lenders for losses caused by allegedly deficient loan underwriting practices performed by the selling institution. A typical scenario is that the financial institution (FI) receives a Fannie Mae “request” to buy back a mortgage three or more years AFTER the foreclosure, claiming that the initial underwriting by the FI was deficient. What do you do? While each buyback demand has its unique circumstances, we can provide some general observations/comments:
  1. Review your contractual rights and responsibilities. While the Fannie Mae contract and Selling Guide are unquestionably one sided, they should be carefully reviewed to determine what your FI’s rights and obligations are.
  2. Determine whether your FI really did anything wrong. This will require a forensic audit of the loan file and the Desktop Underwriter terms in place at the time of underwriting/approval. Our experience is that Fannie Mae often alleges underwriting deficiencies but has done little to no homework before making that assertion. Do NOT accept their assertions as fact; investigate as needed at your end.
  3. Analyze materiality. Even if your FI did not exactly follow the underwriting requirements in place at that time, a small mistake may not in reality have caused a subsequent loan loss.
  4. Analyze timing/delays. Fannie Mae often forecloses and sells collateral and only after the fact starts looking at possible underwriting deficiencies. But a long delay, selling too cheaply, adding interest to the deficiency after the fact may not be allowed for under the contract and/or applicable law.
  5. Count the cost of saying “no.” Even if your FI has a strong legal position, would challenging a Fannie Mae buyback request jeopardize the current and future business relationship? What is the likelihood of a lawsuit and the result? Who has to pay attorneys’ fees?
  6. Consider Fannie Mae’s internal and external pressures and motivations. Fannie Mae has recouped billions from the large banks in buyback settlements, but these cases have largely “wound down” now. Fannie Mae appears to view the smaller FIs (with lower volume) as much less interesting to pursue legally, as the investment of resources and likelihood of large recoveries are not cost effective. Moreover, Fannie Mae’s regulator, the Federal Home Finance Association, is putting pressure on Fannie Mae to wrap up its buyback efforts.
  7. Review insurance coverage. If a material underwriting deficiency is found, your FI may have insurance coverage for a loan policy violation. Other possible coverages may also apply, depending on the circumstances.
So, is it a good idea or bad idea to challenge a Fannie Mae buyback demand? The answer depends upon your FI’s individual circumstances, after careful consideration of the above as well as any other factors relevant to your FI’s situation.