In the face of a challenging housing market, Freddie Mac has committed to do what we can to enhance our processes and reduce costs. One important example of this work is how we’ve tackled loan repurchases.

The volume of loan defects identified on incoming loans we purchase, also known as Non-Acceptable Quality (NAQ) rates, reached a high point in the third quarter of 2022 as the result of significant refinance volume during the pandemic. Consequently, repurchase requests on those loans peaked in first quarter of 2023.

We began an open dialog with our lenders and other industry participants, enhancing our communication and collaboration. We also piloted a fee-based repurchase alternative to a limited number of lenders. While those efforts proved effective, we continued to look for additional improvements to our quality control (QC) processes. As a result, we recently announced three major changes to the way we do business with lenders. These include:

  • Expanding the option for all lenders to voluntarily enroll in our performing loan repurchase alternative pilot, which will begin in the first quarter of 2025.
  • Offering a new fee-only remedy under our existing repurchase framework.
  • Increasing transparency by reporting on loan repurchases on a quarterly basis.

Before providing greater detail about each of these items, it’s worth sharing our progress thus far.

Since starting the effort to address the problem, performing loan repurchase requests declined materially. In fact, NAQ rates on incoming loans to the company are approximately 28% lower than their peak in the third quarter of 2022. As a result, repurchase requests are trending down to approximately 55% lower than their peak in the first quarter of 2023. For vitally important small and community lenders, repurchase requests are even lower, down 80%.

Although this performance is encouraging, we’re not done. Here’s what we are doing to improve on our progress thus far.

Our New Quality Control Measures

Currently, loan repurchase is the primary remedy for all loans with significant defects identified during QC reviews, regardless of performance status. By both expanding our existing repurchase alternative pilot and introducing a new fee-only remedy for those who choose not to opt into the expanded pilot, we aim to reconsider the decades-old single loan repurchase remedy approach.

Expanding our repurchase alternative: The expanded pilot uses a fee-based structure that is more efficient and transparent and rewards lenders that deliver high-quality loans. Specifically:

  • Lenders with a NAQ rate above 2% will be charged a fee in a step-up approach based on the unpaid principal balance of loans delivered for the quarter.
  • The fee will be assessed on lenders who deliver enough loan volume to generate statistically significant sampling.
  • Lenders will not be required to repurchase most performing loans with significant defects and Freddie Mac will waive fees for small lenders that do not have a statistically significant NAQ rate.
  • Because the new pilot is optional, each year lenders can determine which path they want for performing loan repurchases for the upcoming year.
  • The process for lenders to appeal and/or correct loans with defects as defined in the Seller/Servicer Guide will remain unchanged.
  • This pilot remains within the representations and warrants (R&W) framework and loans that default within the 36-month R&W relief period will still be subject to repurchase.
  • Freddie Mac has enhanced its seller risk monitoring program to apply remedies, such as restriction on business, that will trigger if a lender consistently has high NAQ rates.

New fee-only option with immediate R&W relief: For lenders who choose to continue participating in Freddie Mac’s traditional performing loan remedies framework, the company will now offer a new fee-only option. With this fee-only remedy, lenders can obtain immediate R&W relief in lieu of repurchasing a defective loan. This remedy is for eligible loans delivered to us in the first quarter of 2025.

Enhanced transparency and reporting: Beginning next year, we will publish a new quarterly report that will provide greater transparency on loan repurchase activity. Through this offering, lenders will be better able to assess their own proprietary data against broader industry manufacturing quality.

Though we expect lenders to continue doing their part to improve loan quality, we will take additional steps to improve our quality control review process to ensure outcomes are consistent, reasons for defects are well-defined, and feedback to lenders is clear. We remain committed to listening to feedback from lenders and industry partners as our business and economic conditions evolve and look forward to building a stronger housing industry that supports sustainable homeownership opportunities.

©2024 by Freddie Mac.