Fannie Mae classifies mortgages into three different origination types:
Refer to E-3, Glossary for the definition of each origination type.
A third-party origination is any mortgage that is completely or partially originated, processed, underwritten, packaged, funded, or closed by a third-party originator, that is, an entity other than the lender that sells the mortgage to Fannie Mae, such as a mortgage broker or correspondent. Fannie Mae does not consider a mortgage that is originated and/or funded by a lender’s parent, affiliate, or subsidiary to be a third-party origination unless the parent, affiliate, or subsidiary uses the services of a mortgage broker or loan correspondent to perform some or all of the loan origination functions.
The lender is responsible for ensuring that any mortgages originated and processed by third parties that it sells to Fannie Mae meet Fannie Mae’s eligibility criteria and are originated in a sound manner (see D1-1-01, Lender Quality Control Programs, Plans, and Processes and A3-2-02, Responsible Lending Practices). Special Feature Codes are required at delivery for third-party mortgage loans (see Special Feature Codes).
Lenders remain fully liable to Fannie Mae under the terms of their Contractual Obligations for any functions that are outsourced to third parties.
Before entering into an agreement with a third-party originator, the lender must satisfy itself that the third-party originator is capable of producing quality mortgages. Therefore, Fannie Mae requires the lender to have written procedures for the approval of third-party originators. Specifically, the lender’s procedures must include a review of the following:
most recent financial statements;
resumes of principal officers and underwriting personnel;
the third party’s QC procedures so that the lender can determine if the party and its originations comply with the lender's standards for quality;
results of background checks for principal officers (for example, obtaining a credit report, screening through a mortgage fraud database or investor exclusionary list, confirming business references, etc.); and
the third-party originator's hiring procedure for checking all employees, including management, involved in the origination of mortgage loans (including application through closing) against the U.S. General Services Administration (GSA) Excluded Parties List, the HUD Limited Denial of Participation List (LDP List), and the Federal Housing Finance Agency (FHFA) Suspended Counterparty Program (SCP) list.
Lenders must have effective procedures for management of third-party originations, given that lenders may lack first-hand knowledge about the borrowers, properties, and business practices of the individuals who originate the mortgage loans. Fannie Mae recommends that lenders document their arrangement with third-party originators by a contractual agreement that includes specific warranties related to the eligibility of mortgages and the third-party originator’s responsibilities, as well as avenues of recourse that can be taken if the warranties are breached.
Effective management procedures for third-party originations include:
|✓||Management Procedures for Third-Party Originations|
|A system for evaluating and approving third-party originators|
|A method for verifying, and periodically reverifying, a third-party originator’s compliance with applicable laws, licensing, and qualifications for originating mortgage loans|
|A method for confirming that a third-party originator complies not only with its contract with the lender, but also with the terms of the lender’s Contractual Obligations with Fannie Mae|
|A requirement that a third-party originator have a written QC plan and a method to validate the existence of that plan|
|A process for resolving QC discrepancies and tracking corrective actions|
|A requirement for submitting periodic reports on activity and performance issues to the lender’s senior management|
|Standards for evaluating a third-party originator’s performance|
|Provisions for suspending or terminating the third-party originator’s relationship|
|Annual review of the third-party originator’s financial statements to determine that it is financially viable and capable of meeting its contract terms|
|Quarterly review of the performance of mortgage loans originated by the third-party originator (for example, particularly delinquencies and foreclosures)|
If a lender enters into a contract with a third party known for the quality of its underwriting (such as a mortgage insurer) to help the lender in underwriting its mortgage originations, the mortgage loans will not be considered third-party originations.
Note: Fannie Mae monitors the performance of third-party originations from lenders to identify issues with performance or profile. Based on these reviews, Fannie Mae may take action against lenders, up to and including restricting or eliminating a lender’s ability to deliver third-party originations to Fannie Mae.
The table below provides references to the Announcements that have been issued that are related to this topic.