Fannie Mae 2013 Annual Report Download - page 127

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As part of our credit risk management process, we conduct reviews on random samples of performing loans soon after
acquisition in order to identify loans that may not have met our underwriting or eligibility requirements. Performance for the
random sample is measured using a significant findings rate, which represents the proportion of loans in the sample
population with significant underwriting defects. The significant findings rate does not necessarily indicate how well the
loans will ultimately perform. Instead, we use it to estimate the percentage of loans we acquired that potentially had a
significant error in the underwriting process. Based on these reviews, we believe that, over the last three years, the percentage
of loans we acquired that have significant underwriting defects has been reduced.
Beginning with loans delivered in 2013, and in conjunction with our new representation and warranty framework that is
discussed below, we have made changes in our quality control process that move the primary focus of our quality control
reviews from the time a loan defaults to shortly after the time the loan is delivered to us. We have implemented new tools to
help identify loans delivered to us that may not have met our underwriting or eligibility guidelines and use these tools to help
select a discretionary sample of loans for quality control reviews shortly after delivery. Our quality control includes
reviewing and recording underwriting defects noted in the file, and determining if the loan sold met our underwriting and
eligibility guidelines. We also use these reviews to provide lenders with earlier feedback on underwriting defects. Because of
these changes, the significant findings rate for 2013 deliveries, which we will begin to report later in 2014, will not be
comparable to prior period reporting.
Our representation and warranty framework for conventional loans acquired on or after January 1, 2013, which is part of
FHFA’s seller-servicer contract harmonization initiative, seeks to provide lenders a higher degree of certainty and clarity
regarding their repurchase exposure and liability on future deliveries, as well as consistency around repurchase timelines and
remedies. Under the new framework, lenders will be relieved of certain repurchase obligations for loans that meet specific
payment history requirements and other eligibility requirements. For example, a lender would not be required to repurchase a
mortgage loan in breach of certain underwriting and eligibility representations and warranties if the borrower has made
timely payments for 36 months following the acquisition date (or, for Refi Plus loans, for 12 months following the acquisition
date), and the loan meets other specified eligibility requirements. Certain representations and warranties are “life of loan”
representations and warranties, meaning that no relief from enforcement is available to lenders regardless of the number of
payments made by a borrower. Examples of life of loan representations and warranties include, but are not limited to, a
lender’s representation and warranty that it has originated a loan in compliance with all laws and that the loan conforms to
our Charter requirements.
As discussed in “Business—Our Charter and Regulation of Our Activities—Charter Act,” our charter generally requires
credit enhancement on any single-family conventional mortgage loan that we purchase or securitize if it has an LTV ratio
over 80% at the time of purchase. However, under HARP, we allow our borrowers who have mortgage loans with current
LTV ratios above 80% to refinance their mortgages without obtaining new mortgage insurance in excess of what was already
in place. See “Credit Profile Summary—HARP and Refi Plus Loans” below for more discussion on HARP and its impact on
our single-family conventional business volume and guaranty book of business.
Borrower-paid primary mortgage insurance is the most common type of credit enhancement in our single-family guaranty
book of business. Primary mortgage insurance transfers varying portions of the credit risk associated with a mortgage loan to
a third-party insurer. In order for us to receive a payment in settlement of a claim under a primary mortgage insurance policy,
the insured loan must be in default and the borrower’s interest in the property that secured the loan must have been
extinguished, generally in a foreclosure action. The claims process for primary mortgage insurance typically takes three to six
months after title to the property has been transferred.
Mortgage insurers may also provide pool mortgage insurance, which is insurance that applies to a defined group of loans.
Pool mortgage insurance benefits typically are based on actual loss incurred and are subject to an aggregate loss limit. Under
some of our pool mortgage insurance policies, we are required to meet specified loss deductibles before we can recover under
the policy. We typically collect claims under pool mortgage insurance three to six months after disposition of the property
that secured the loan. For a discussion of our aggregate mortgage insurance coverage as of December 31, 2013 and 2012, see
“Risk Management—Credit Risk Management—Institutional Counterparty Credit Risk Management—Mortgage Insurers.”
Our mortgage servicers are the primary points of contact for borrowers and perform a vital role in our efforts to reduce
defaults and pursue foreclosure alternatives. We discuss the actions we have taken to improve the servicing of our delinquent
loans below in “Problem Loan Management.”
FHFA’s 2013 conservatorship scorecard included an objective to demonstrate the viability of multiple types of risk transfer
transactions involving single-family mortgages with at least $30 billion of unpaid principal balance. In October 2013, we
issued our first credit risk sharing securities under our Connecticut Avenue Securities (“C-deal”) series. In contrast to our
typical Fannie Mae MBS transaction, where we retain all of the credit risk associated with losses on the underlying mortgage