Recent Fannie Mae update has mortgage industry evaluating operational decisions: the information you need

On March 1, the Federal National Mortgage Association (aka Fannie Mae) released its Selling Notice (SEL-2023-02), which features several pivotal updates for the mortgage industry. Most notably, it introduces updated quality control (QC) requirements in an effort to improve overall loan quality and reduce the number of loans requiring post-close remediation by lenders. Fannie Mae also enhanced both prefunding and post-closing QC policies and is encouraging lenders to implement them immediately.

Lender quality control key updates

• Reporting requirements were enhanced in order to ensure lenders are delivering the proper data and information derived from their QC results.
• Lenders must now complete a minimum number of prefunding reviews monthly and the total number of loans to be reviewed must equal either 10% of the prior month’s total closings or 750 loans.
• The time frame for the post-closing QC cycle will now be 90 days instead of 120, and individual component time frames have been eliminated, thus allowing lenders to complete each part of the QC cycle as they see fit.
• Supplementary guidance has been provided for the key differences between full-file and component reviews to maximize lender efficiencies in meeting these numbers.

Fannie Mae stated that lenders must implement these changes no later than Sept. 1, 2023. The 10% prefunding loan population in the September 2023 cycle will be based on the total number of loans closed the month prior. The post-closing cycle that begins Sept. 1 must be completed by Nov. 30, 2023.

Full-file and component review supplementary guidance

As a long-standing practice, Fannie Mae encourages lenders to focus QC efforts on areas that have a higher potential for errors, misrepresentation or fraud, for example, loans with complex income calculations (rental, self-employed, etc.), loans with nonstandard guidelines or loans secured by properties experiencing rapid increases or declines of property values.

As part of the new guidance, Fannie Mae added two additional areas of focus:

• Loans with flags and messages that indicate potential overvaluation or appraisal quality issues scored through Collateral Underwriter (CU)
• Loans that test the effectiveness of action plan controls

The file review must now control not only a review of the appraisal, but validation of reconciliation of CU flags and messages.

Fannie Mae also recognized that the formalization of the new 10% prefunding QC requirement could present a significant cost increase to lenders and has provided some relief in its announcement. As a part of the new prefunding QC requirement, a lender is able to include both full-file reviews and lower-cost component reviews in order to effectively satisfy the 10% selection requirement.

Component reviews are designed to increase the focus on higher risk parameters in a more cost-effective manner. The increased focus on high-risk categories – coupled with increased scrutiny of a lender’s action-planning process – moves more of the risk identification and remediation upstream in the origination process as opposed to after the loan has closed when curative options are more limited.

Four common targeted component QC focal areas

1. Income: Reviews of debt-to-income (DTI) ratios over certain thresholds, self-employment income, rental property income or debt
2. Assets: Examples include large deposits and sourcing of same
3. Liabilities: Is debt properly included or excluded and documented correctly? Examples include student loan payment calculations or solar panel liabilities
4. Appraisals: Comparable selections and adjustments

Most lenders are currently working diligently either internally or with their partners to formulate solutions that address the changes required by Fannie Mae. Based on our conversations, lenders are focused on developing strategies that cost-effectively meet the requirements as set forth in Selling Notice (SEL-2023-02) that will best fit each company’s lending practices and risk assessments, while strategically planning for unpredictable funded unit volumes.

Baker Tilly’s Mortgage Center of Excellence offers assistance with quality control, risk management, regulatory compliance and servicing – all in one place. Our mortgage specialists can help your organization traverse the ever-changing mortgage landscape and face new and existing challenges head on. Discuss the state of the industry with our team and how we can help you prepare for the future, today.