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Promote Responsible LendingAvoid Repurchase Risk. Connie FerranVice President, Customer Credit ManagementSeptember 24, 2009. 3. Responsible Lending Reduces Repurchase Risk. The parameters of individual loansPlusThe process by which loans are createdCredit quality has improved signifi
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3. 3 Responsible Lending Reduces Repurchase Risk The parameters of individual loans
Plus
The process by which loans are created
Credit quality has improved significantly, but manufacturing deficiences are a concern
4. 4 Credit Policy Changes in Support of Responsible Lending Freddie Mac’s credit parameters have undergone realignment since late 2007
Our credit parameters will withstand economic volatility and changes in the market
We will not compromise our credit standards
Instead, we find solutions that create process efficiencies while ensuring proper controls and prudent underwriting throughout the manufacturing/origination process
Policy revisions have addressed:
High LTV lending
Excessive layering of risk
No/low documentation lending
Risky product types
Importance of sound underwriting practices and well-controlled origination processes
Appraisal weaknesses
Weak condominium performance
Borrower’s ability to refinance FRE-owned loans despite lack of equity in property
5. 5 Today, Process Deficiencies are Driving Repurchases and Delinquencies Loans with underwriting or collateral deficiencies are substantially more likely to become 90 days delinquent in the first year
Loans with early performance issues are reviewed for compliance as part of our QC process and are more likely to lead to repurchase due to ineligibility for sale to Freddie Mac
6. 6 Ineligible Rates for Performing Loans Peaked in 3Q08 Improvements seen in credit quality over the last few months, however, we are still seeing some common deficiencies in the underwriting process around:
Inaccurate data provided invalidates AUS decision or manual underwriting reviews
Documentation insufficient or inadequate to support eligibility decision
Errors with Income and liability calculations, asset verifications
Questionable appraisal quality
Loans with one or more deficiencies related to automated underwriting compliance, appraisal quality or LTV compliance have a strong likelihood of going into default
With close to 100% of the PL loans reviewed in 1Q09 nearly 13% (weighted) were deemed ineligible for sale to Freddie Mac. 2Q is still preliminary with 77% reviewed but we expect it to be close to that of 1Q09. Somewhere in the range of 12-14%. If asked, weighted vs. unweighted: The existing PL sample is a stratified targeted sample which results in oversampling higher risk loan attributes and characteristics and is, therefore, not representative of the true population. The weighted ineligible rate is re-weighted to represent the underlying population and is a more representative estimate of the population ineligible rate.
Nearly 35% of the NPL loans reviewed in 1Q09 were deemed ineligible for sale to Freddie Mac. We anticipate as we close out the reviews for 2Q09, the ineligible rate will be similar to that of 1Q09 or lower.
Several activities taking place to help customers with returning to the basics of underwriting:
Released industry Guide bulletin strengthening and re-enforcing our requirements on income, assets and liabilities. Also included appraisal best practices and suggesting Sellers use tested collateral valuation tools to help identify questionable appraised values.
Having Seller specific conversations to enhance manufacturing controls.
Providing general training for customers as well as targeted training for specific sellers.
Providing workshops for our Regional and Community Lending customers to help reduce their ineligible rates.
Leveraging speaking opportunities such as the MBA and numerous conferences being held throughout the remainder of the year.
Internal training of employees, internal and external publications and articles and other media outlets.
Improvements seen in credit quality over the last few months, however, we are still seeing some common deficiencies in the underwriting process around:
Inaccurate data provided invalidates AUS decision or manual underwriting reviews
Documentation insufficient or inadequate to support eligibility decision
Errors with Income and liability calculations, asset verifications
Questionable appraisal quality
Loans with one or more deficiencies related to automated underwriting compliance, appraisal quality or LTV compliance have a strong likelihood of going into default
With close to 100% of the PL loans reviewed in 1Q09 nearly 13% (weighted) were deemed ineligible for sale to Freddie Mac. 2Q is still preliminary with 77% reviewed but we expect it to be close to that of 1Q09. Somewhere in the range of 12-14%. If asked, weighted vs. unweighted: The existing PL sample is a stratified targeted sample which results in oversampling higher risk loan attributes and characteristics and is, therefore, not representative of the true population. The weighted ineligible rate is re-weighted to represent the underlying population and is a more representative estimate of the population ineligible rate.
Nearly 35% of the NPL loans reviewed in 1Q09 were deemed ineligible for sale to Freddie Mac. We anticipate as we close out the reviews for 2Q09, the ineligible rate will be similar to that of 1Q09 or lower.
Several activities taking place to help customers with returning to the basics of underwriting:
Released industry Guide bulletin strengthening and re-enforcing our requirements on income, assets and liabilities. Also included appraisal best practices and suggesting Sellers use tested collateral valuation tools to help identify questionable appraised values.
Having Seller specific conversations to enhance manufacturing controls.
Providing general training for customers as well as targeted training for specific sellers.
Providing workshops for our Regional and Community Lending customers to help reduce their ineligible rates.
Leveraging speaking opportunities such as the MBA and numerous conferences being held throughout the remainder of the year.
Internal training of employees, internal and external publications and articles and other media outlets.
7. 7 Collateral Valuation Defects are on the Rise Collateral valuation tools reflect an increase in appraisal deficiencies
8. 8 Operational Reviews Most Common Seller/Servicer Deficiencies
9. 9 Best Practices Can Mitigate Ineligible Findings and Repurchases…Focus on FACTS So in conclusion,
Freddie Mac has experienced high volumes of loans sampled for quality control reviews due to unprecedented growth in foreclosures in the last two years driven by the general economic downturn and the high-risk characteristics of specific loan programs.
Monthly loan samples have tripled when compared to mid-2007 monthly sample volumes and outstanding repurchases have grown similarly.
Freddie Mac has increased quality control staff, expanded our use of contract underwriting services, and improved underwriting and repurchase processes.
We continue to see improvements in the credit-quality mix of Freddie Mac’s loan purchases as a result of credit parameter tightening.
We also continue to work closely with our customers to improve their origination and manufacturing practices to avoid repurchases, as well as collect on open repurchase demands.
Following the FACTS is essential to abate ineligible findings and repurchases. So in conclusion,
Freddie Mac has experienced high volumes of loans sampled for quality control reviews due to unprecedented growth in foreclosures in the last two years driven by the general economic downturn and the high-risk characteristics of specific loan programs.
Monthly loan samples have tripled when compared to mid-2007 monthly sample volumes and outstanding repurchases have grown similarly.
Freddie Mac has increased quality control staff, expanded our use of contract underwriting services, and improved underwriting and repurchase processes.
We continue to see improvements in the credit-quality mix of Freddie Mac’s loan purchases as a result of credit parameter tightening.
We also continue to work closely with our customers to improve their origination and manufacturing practices to avoid repurchases, as well as collect on open repurchase demands.
Following the FACTS is essential to abate ineligible findings and repurchases.
10. 10 As a Reliable Partner, Freddie Mac Provides Tools, Resources, and Training Expanded training programs to better address deficiencies in the loan manufacturing process.
Customized Training: Targeted at the customers with the greatest deficiencies.
Open Webinars: Two new open session webinars. Topics are Underwriting Income & Employment and Documenting Acceptable Sources of Funds.
Power of Strong Underwriting: Full day in-person underwriting training session focused on income, employment, assets, and collateral.
Tools and Resources: Launched a new Processing Reminders job aid for LP feedback messages and a revised LP Documentation Matrix.
A broad range of training opportunities are available to you at www.freddiemac.com/learn
11. 11 Key Messages Credit quality has improved
Manufacturing quality is improving, but still needs focus
Underwriting and collateral valuation deficiencies are evident across all indicators
Model results
File reviews
Operational reviews
Loan performance
Freddie Mac will continue to:
Work with lenders to improve loan quality, the loan manufacturing process and reduce the cost of repurchase
Adjust credit policies, as necessary, to help address manufacturing defects and performance issues
Provide tools, best practices and training to address areas of concern