Selling Guide

Published October 2, 2018

Overview

In order to sell loans to Fannie Mae or deliver pools of loans to Fannie Mae for MBS, the lender makes representations and warranties as to certain facts and circumstances concerning the lender and the mortgage loans it is selling or delivering. Fannie Mae provides lenders with relief from enforcement for breaches of certain underwriting and eligibility representations and warranties for loans meeting the requirements set forth in A2-3.2-02, Enforcement Relief for Breaches of Certain Representations and Warranties Related to Underwriting and Eligibility (“enforcement relief”). No enforcement relief is available for certain “life-of-loan” representations and warranties.

Life-of-Loan Representations and Warranties

A lender is not relieved from the enforcement of breaches of its representations and warranties on any mortgage loan, including eligible mortgage loans, with respect to the following matters even if those matters are addressed in Subparts B1 through B5 of the Selling Guide (the subparts that pertain to underwriting and eligibility). With respect to each mortgage loan, a lender remains responsible throughout the life of that loan for representations and warranties related to the following, as more fully described below:

  • Fannie Mae Charter Act Matters;

  • Misstatements, Misrepresentations, and Omissions;

  • Data Inaccuracies;

  • Clear Title/First-Lien Enforceability;

  • Compliance with Laws and Responsible Lending Practices; and

  • Unacceptable Mortgage Products.

Life-of-Loan Exclusions: Fannie Mae Charter Act Matters

The lender is responsible for representations and warranties for the life of the loan for compliance with Fannie Mae's Charter Act. In accordance with its Charter Act requirements, a mortgage loan (or any participation interest therein) must meet all of the following requirements to be eligible for sale to Fannie Mae:

  • be secured by property that is residential in nature. Properties that are not residential include, but are not limited to, vacant land, property primarily used for agricultural or commercial purposes, or units located in condo or co-op hotels;

  • be secured by a property located within the 50 states of the United States of America, the District of Columbia, or any territory or possession of the United States;

  • be secured by a property with four or fewer units, unless sold through Fannie Mae’s multifamily mortgage business;

  • have an original principal balance not greater than the applicable maximum loan limit in effect at the time of Fannie Mae’s acquisition; and

  • have a loan-to-value (LTV) ratio of 80% or less of the security property’s value at the time Fannie Mae acquires the loan or, if the mortgage has an LTV ratio in excess of 80%, the mortgage

    • has mortgage insurance on the portion of the mortgage in excess of 80% of the property's value (or for DU Refi Plus and Refi Plus mortgage loans, otherwise meets Fannie Mae’s requirements), provided by a mortgage insurer approved under Fannie Mae’s Qualified Mortgage Insurer Approval Requirements;

    • was sold with recourse for such period and under such circumstances as Fannie Mae may require; or

    • was sold on a participation basis when the lender retains a minimum 10% interest.

Example

An example of a breach of Charter Act requirements is a mortgage loan secured by a property that consists of a principal residence and a dairy farm, resulting in the property having significant nonresidential use.

Life-of-Loan Exclusions: Misstatements, Misrepresentations, and Omissions

Even if a mortgage loan has met the requirements for enforcement relief set forth in A2-3.2-02, Enforcement Relief for Breaches of Certain Representations and Warranties Related to Underwriting and Eligibility, the lender remains responsible throughout the life of the loan for representations and warranties related to misstatements, misrepresentations, and omissions as set forth below.

In connection with a mortgage loan that has qualified for relief under the framework, “misrepresentations” means any misstatements, misrepresentations, or omissions by any party to the loan transaction made with or without the lender’s knowledge that pertain to the borrower, the property, or the project as set forth in Subparts B1 through B5 of the Selling Guide. Parties to the loan transaction include, but are not limited to, borrowers, property sellers, builders, real estate agents, lenders including the selling lender, mortgage brokers, loan officers, originators, appraisers, appraisal companies, closing agents, title companies, or other third-party vendors performing origination services. Fannie Mae will only assert a remedy for a misrepresentation involving a loan that has qualified for relief under the framework if all of the following criteria have been met. The misrepresentation must

  • involve three or more mortgage loans delivered to Fannie Mae by the same lender;

  • be made pursuant to a common pattern of activity in connection with loan origination or sale, based on information in the loan file or other facts or circumstances that existed at the time of delivery of the loan to Fannie Mae, which involves at least one party common to all the loans;

    • if the selling lender is the common party, involves the same individual; or,

    • if a third party is the common party, involves the same individual or entity; and

  • be “significant,” as defined below.

Note: In identifying three or more loans to constitute the pattern, Fannie Mae may count loans that have obtained relief under the framework and loans that have not obtained such relief. Each loan in the pattern must meet all the requirements above in order for Fannie Mae to enforce a remedy pursuant to this life-of-loan exclusion.

A misrepresentation (as defined above) is “significant” if Fannie Mae, using true and accurate information, determines

  • that the loan would not have been eligible for sale to Fannie Mae under the terms of the lender’s contract with Fannie Mae in effect at the time of delivery of the loan, or

  • that the loan would have been eligible for purchase, but under different terms.

In making this determination of significance, Fannie Mae will rely upon a DU simulator. The DU simulator will use the true and accurate loan information to approximate the DU recommendation as of the time of delivery and compare it to the DU recommendation the lender obtained in the final DU loan submission before delivery. If the loan originally did not have a DU recommendation, the DU simulator will compare the new DU recommendation to the DU recommendation the loan would have received using the data provided at delivery, had the lender used DU.

A misrepresentation will be considered “significant” for purposes of the life-of-loan test, and the lender will be required to repurchase the loan only if the loan receives a worse DU recommendation from the simulator than it received (or would have received) at the time of delivery to Fannie Mae, except that Fannie Mae will also take into account any applicable variance and the impact of any undisclosed concessions, concealed transaction terms, or other violations of the lender’s contract (including Selling Guide requirements) that are involved in the misrepresentation, but are not evaluated by the DU simulator, when determining significance. Fannie Mae will notify the lender of any such undisclosed matters or violations that are considered in connection with determining such significance. Fannie Mae will provide the lender with documentation supporting the significance determination.

If Fannie Mae determines that the loan would have been eligible for purchase under different terms than those under which the loan was sold, Fannie Mae will not seek repurchase, but instead will re-price the loan, consistent with the lender’s contract at the time of loan delivery, to reflect the true risk profile of the loan.

Fraud. A mortgage loan involving fraud will be subject to repurchase, regardless of whether the standards described above (that is, the number of affected loans, a common pattern of activity, and a significance determination) have been met. For purposes of this life-of-loan exclusion only, fraud is established either by

  • an adjudicated claim affirming fraud by or against the lender or other party to the loan transaction; or

  • Fannie Mae finding clear and convincing evidence that the lender or other party to the loan transaction knowingly executed or participated in a scheme or artifice in connection with the underwriting, origination, or sale of a loan in order to

    • defraud Fannie Mae or any other party to the loan transaction; or

    • obtain any moneys, funds, credits, assets, securities, or other properties from Fannie Mae or any other party to the loan transaction by means of fraudulent pretenses, representations, or promises.

Note: Lenders continue, at all times, to be responsible for any misstatement, misrepresentation, or omission in connection with any matter not relieved under the framework (that is, not addressed in Subparts B1 through B5 of the Selling Guide). Mortgage loans are subject at all times to Fannie Mae’s standard requirements related to fraud, misstatements, misrepresentations, or omissions as described in the Selling Guide, A3-4-03, Preventing, Detecting, and Reporting Mortgage Fraud. The lender is required to report suspected mortgage fraud whenever a reasonable basis exists to conclude that it may have occurred, regardless of whether the loan has obtained relief or Fannie Mae may require the lender to repurchase the loan.

Examples

The following examples illustrate some instances of application of this life-of-loan exclusion:

  • An example of a misstatement in which the lender may be required to repurchase loans even if the loans have obtained relief:

    In order to qualify borrowers in four separate home purchase transactions, the same loan officer employed by a lender understates the liabilities of the borrowers in each DU submission, affecting the debt-to-income ratio in each instance. The lender sells all four loans to Fannie Mae. The pattern of understatements comes to light after the loans have obtained relief under the framework. Fannie Mae utilizes the DU simulator, applying the DU rules that were in place at the time of delivery of each loan and the correct amount of total borrower liabilities. The DU simulator provides an “ineligible” recommendation for each of the four loans. In this instance, the lender must repurchase the four loans, if requested, despite the fact that the loans obtained relief.

  • An example of an omission in which the lender may be required to repurchase the mortgage loans even if the loans have obtained relief:

    In order to sell newly-built homes more quickly, a real estate agent and a property developer provide each borrower in three separate transactions with a $15,000 rebate outside of closing that is not disclosed in the sales contracts or in the settlement statements. All three loans are sold to Fannie Mae by the same lender. This practice is in violation of Fannie Mae's undisclosed interested party contributions policy. Had these rebates been taken into account, each of the loans would have failed to qualify for purchase by Fannie Mae. Though this policy is not evaluated by, or able to affect the results of, the DU simulator, noncompliance makes the loans ineligible for delivery. In this instance, the lender must repurchase the three loans, if requested, even if the loans have obtained relief.

  • An example of fraud in which the lender may be required to repurchase a single mortgage loan because of clear and convincing evidence of a scheme or artifice to defraud:

    A borrower borrows $10,000 from his friend as part of a down payment on a home. He has secretly promised to pay his friend back with interest. The borrower provides a falsified gift letter to the lender documenting a $10,000 gift from an uncle. The lender would be required, if requested, to repurchase the loan if Fannie Mae subsequently can demonstrate that part of the down payment was borrowed—even if the loan had obtained relief. Because the borrower’s misstatement to the lender involved the knowingly executed scheme or artifice to obtain a loan by use of fraudulently fabricated evidence that supports an incorrect factual representation made by the borrower, the loan is subject to repurchase, despite not involving a pattern of activity affecting three or more loans or meeting the “significance” test.

Life-of-Loan Exclusions: Data Inaccuracies

Lenders are responsible for supplying Fannie Mae with high-quality, accurate, and complete data through a variety of systems, including but not limited to, Fannie Mae’s whole loan committing application, DU, and Loan Delivery. (See A3-4-02, Data Quality and Integrity, for additional information.)

Even if a mortgage loan has met the requirements for enforcement relief set forth in A2-3.2-02, Enforcement Relief for Breaches of Certain Representations and Warranties Related to Underwriting and Eligibility, the lender remains responsible throughout the life of the loan for representations and warranties related to data accuracy as set forth below. In connection with mortgage loans delivered to Fannie Mae, there must not be delivery data (Uniform Loan Delivery Dataset) inaccuracies pertaining to the borrower, the property, or the project, if and to the extent

  • the data inaccuracies affect five or more loans and involve the same delivery data element(s);

  • such delivery data differ from the information documented in the lender's mortgage loan files; and

  • the data inaccuracies are “significant,” in that, using the information of the loan file to qualify the borrower, property, and project,

    • the loan would not have been eligible for delivery under the terms of the lender’s contracts with Fannie Mae in effect at the time of delivery of the loan; or

    • the loan would have been eligible for sale to Fannie Mae, but under different terms.

Note: In identifying five or more loans involving the same data element inaccuracy, Fannie Mae may count loans that have obtained relief under the framework and loans that have not obtained such relief. Each loan in the pattern must meet all the requirements above in order for Fannie Mae to enforce a remedy.

In determining whether the data inaccuracies are “significant” for purposes of the life-of-loan test, Fannie Mae will rely upon the DU simulator. The DU simulator will use the true and accurate loan information to approximate the DU recommendation as of the time of delivery and compare it to the DU recommendation the lender obtained in the final DU loan submission before delivery. If the loan originally did not have a DU recommendation, the DU simulator will compare the new DU recommendation to the DU recommendation the loan would have received using the data provided at delivery, had the lender used DU.

A data inaccuracy will be considered significant and the lender will be required to repurchase the loan only if the loan receives a worse DU risk assessment from the simulator than it received (or would have received) at the time of delivery to Fannie Mae. Fannie Mae will also take into account any applicable variance entered into with the lender when determining such significance. Fannie Mae will provide the lender with documentation supporting the significance determination.

If Fannie Mae determines that the loan would have been eligible for purchase using the accurate information from the loan file but under different terms than those under which the loan was sold, Fannie Mae will not seek repurchase, but will instead re-price the loan, consistent with the lender’s contract at the time of loan delivery, to reflect the true risk profile of the loan.

Examples

The following examples illustrate instances of application of this life-of-loan exclusion:

  • In connection with a system upgrade, a coding error is introduced into a lender’s system such that the representative credit score is incorrectly calculated. The lender reports inaccurate representative credit scores at loan delivery for five or more loans. After the loans obtain relief, a review of the credit reports in the lender’s origination files shows that for these mortgages, the actual representative credit scores were lower than those reflected in the data provided at delivery. The DU simulator, using the actual representative credit scores, produces an “ineligible” recommendation for each loan. The lender must repurchase the affected loans, if requested, despite the fact that the loans have obtained relief.

  • For unknown reasons over a period of time, the lender’s origination system indicated that TILA-exempt investment property loans were principal residences. This error was reflected both in the DU submission and in the ULDD data at delivery for 30 loans. After the loans obtained relief, a review of the documentation in the lender’s loan files uncovers the error. The DU simulator, using the correct, revised data, produces an “Approve/Eligible” recommendation on 20 of the loans and a “Refer with Caution/Ineligible” recommendation on the other 10 loans. Fannie Mae will not require the lender to repurchase the 20 loans, but may assess increased loan-level price adjustments to reflect their actual risk. However, if requested, the lender must repurchase the 10 loans that received a “Refer with Caution/Ineligible” recommendation.

Life-of-Loan Exclusions: Clear Title/First-Lien Enforceability

The lender is responsible for representations and warranties for the life of the loan that pertain to clear title and first-lien enforceability. A mortgage loan must

  • be sold by a lender that was the sole owner and holder of the mortgage loan and had the full right and authority to sell and assign it, or a participation interest therein, to Fannie Mae. The lender’s right to sell or assign the mortgage loan cannot be subject to any other party’s interest or to an agreement with any other party;

  • be a valid and subsisting first lien enforceable in accordance with its terms (with no pending condemnation or other legal proceedings) and that otherwise meets Fannie Mae’s requirements for loan documents;

  • have a mortgagee policy of title insurance meeting Fannie Mae’s requirements, or other title evidence acceptable to Fannie Mae. Lenders continue to be responsible for all warranties related to title, marketability, and lien position, regardless of whether included or excluded by coverage under a mortgagee policy of title insurance. Any defect shown on the title policy would not be considered to be an acceptable minor impediment if there was additional cost or delay involved in curing such defect;

  • permit foreclosure or other enforcement of the note holder’s rights under the loan documents and acquisition of good and marketable title to the underlying security property without incurring any expenses or delays as a result of any matters affecting title to the property, including legal or land use restrictions or other defects relating to the land or location of the improvements.

Examples

Examples of a breach of these clear title/first-lien enforceability requirements include, but are not limited to, the following:

  • Another party, such as a warehouse lender, asserts a claim to or interest in the loan.

  • Fannie Mae is unable to obtain clear title to the property because it is not in first-lien position.

  • The lender fails to properly endorse the note or to adhere to requirements for the use of powers of attorney.

  • A mortgage loan is delivered to Fannie Mae with a Property Assessed Clean Energy (PACE) loan secured by the same property and the mortgage loan does not meet Fannie Mae’s eligibility requirements for mortgages delivered with PACE loans.

  • Improvements that were included in the appraised value of the property do not fall totally within the property’s boundaries or building restriction lines and were not otherwise permitted encroachments under the terms of the Selling Guide.

  • A mortgage loan is delivered to Fannie Mae that is secured by a property encumbered by private transfer fee covenants that do not meet Fannie Mae’s requirements.

Life-of-Loan Exclusions: Compliance with Laws and Responsible Lending Practices

The lender is responsible for representations and warranties for the life of the loan that pertain to compliance with laws and responsible lending practices. A mortgage loan must be originated in compliance with

Examples

Examples of breach of compliance with laws, responsible lending practices requirements, and FHFA directives include, but are not limited to, the following:

  • The appraisal for a mortgage loan does not conform to the Appraiser Independence Requirements.(FHFA directive)

  • A mortgage loan is secured by a unit in a condo project that was not created in compliance with applicable state law. (Compliance with Laws)

  • A mortgage loan has a borrower that is an inter vivos revocable trust that was not formed in accordance with applicable law. (Compliance with Laws)

  • A Texas Section 50(a)(6) loan was not originated in accordance with Texas law. (Compliance with Laws)

  • A lender charged total points and fees for an ATR Covered loan in excess of the applicable limit on such points and fees in Regulation Z, 12 CFR § 1026.43(e)(3). (Compliance with Laws)

  • A HOEPA loan. (Responsible Lending Practices)

Note: Whether any loan is subject to repurchase for noncompliance with laws will depend on whether the conditions for repurchase in A3-2-01, Compliance With Laws, are satisfied. Loans that are not subject to repurchase under A3-2-01 may be subject to other remedies. Loans that violate Fannie Mae’s Responsible Lending Practices or an FHFA directive are subject to repurchase.

Life-of-Loan Exclusions: Unacceptable Mortgage Products

Certain mortgage loan products are not purchased by Fannie Mae. As such, these products are not eligible for the enforcement relief described in A2-3.2-02, Enforcement Relief for Breaches of Certain Representations and Warranties Related to Underwriting and Eligibility. Note that the list below is not intended to be exhaustive; it should be used as a reference tool in conjunction with the requirements of the Selling Guide.

Examples of mortgage loan products that Fannie Mae does not purchase are

  • mortgages with an interest-only feature;

  • graduated-payment mortgages, including growing-equity mortgages;

  • mortgages originated with stated or no income and/or asset documentation (Refi Plus and DU Refi Plus loans are not covered by this provision);

  • mortgages subject to negative amortization;

  • construction mortgages (other than construction-to-permanent);

  • daily simple interest mortgages;

  • mortgages with prepayment penalties;

  • reverse mortgages;

  • mortgages with balloon payments (with or without a reset option); and

  • second liens or other junior mortgages.

Related Announcements

The table below provides references to the Announcements that have been issued that are related to this topic.

Announcements Issue Date
Announcement SEL-2015–12 November 3, 2015
Announcement SEL-2014–16 December 16, 2014
Announcement SEL-2014–07 June 24, 2014
Announcement SEL-2013–06 August 20, 2013
Announcement SEL-2013–03 April 9, 2013