How Does a Mortgage Repurchase Request Work?

A Fannie Mae mortgage repurchase request works as a chain of deadlines that runs from a quality control review to a final award, and a missed deadline ends the challenge rather than losing it. The review designates a defect, and a significant defect produces a demand. The lender then has 60 days to appeal and 15-day windows to seek a second appeal, impasse, management escalation, and Independent Dispute Resolution (IDR). At the forfeiture gates the Guide or the incorporated document says what silence means. On the first gate, if no written appeal arrives within the 60-day period, “it will be assumed that the lender does not contest the demand, and the lender will have no further right to challenge the demand or to continue with the impasse, management escalation, or IDR processes.” The days on the ladder are calendar days, the triggering day is excluded, and “[d]eadlines falling on weekends or federal holidays are extended until the next business day.”

This article covers the Fannie Mae process only. The documents are Fannie Mae Selling Guide A2-3.2-01, A2-3.2-03, D2-1-03, and D2-1-04, and the Independent Dispute Resolution Process document the Guide incorporates by reference, dated 2016 and still the version the Guide links. We read each of them whole for this article. The appeal ladder itself is covered stage by stage in our article on how to appeal a Fannie Mae mortgage repurchase request. This one follows the request from the review that starts it to the award that ends it, and spends its length on the proceeding at the top.

What triggers the demand in the first place?

What triggers the demand in the first place, for a loan the remedies framework covers, is a defect Fannie Mae designates a significant defect, and D2-1-03 ties that designation to a full-file quality control review. The designation is a defined act, not a judgment call made in the demand letter. Under D2-1-03, “[u]pon completion of a full-file quality control review for loans covered by the remedies framework, Fannie Mae will designate any defect uncovered during that review as one of the following”: a “finding,” a “price-adjusted loan (PAL),” or a “significant defect.” A finding is “one or more defects that, when considered with other loan features, does not necessitate a change in the price of the loan or result in the loan being unacceptable even if the true and accurate facts about the loan had been known at the time Fannie Mae purchased or securitized the loan.” A significant defect is “one or more defects that either necessitates a change to the price on which the loan was acquired or result in the loan being unacceptable for purchase had the true and accurate information about the loan been known at time of purchase,” and the topic adds that “[l]oans with findings and PALS are not loans with significant defects.” The consequences follow the label: D2-1-04 provides that “Fannie Mae may not demand repurchase of a PAL and the lender may not voluntarily repurchase a PAL,” and that “[i]f Fannie Mae identifies a significant defect, Fannie Mae will require repurchase of the mortgage loan or may offer the lender a repurchase alternative.”

The framework has an edge. A2-3.2-03 states that “[t]he remedies framework applies to whole loans purchased, and mortgage loans delivered into” mortgage-backed securities (MBS) “with pool issue dates on or after January 1, 2016.” Outside it, A2-3.2-01 keeps the older ground, and it reaches a loan whenever Fannie Mae’s “loan review determines (or Fannie Mae otherwise learns)” that the loan did not meet its requirements: Fannie Mae “may require the lender to immediately repurchase the mortgage loan or acquired property (or Fannie Mae’s participation interest in the mortgage loan) or to remit a make whole payment if the property has been liquidated” on a violation of the Lender Contract. Inside or outside the framework, some repurchases follow from the terms of sale rather than from a defect at all. Those “generally include, but are not limited to, Charter violations, an adjustable-rate mortgage in an MBS pool that has converted to a fixed-rate mortgage per the borrower’s exercise of its option in the mortgage documents, or an MBS mortgage that has 24 payments past due.” The review is not the only way a defect surfaces; D2-1-04 contemplates a repurchase alternative offered “on a loan where a lender self-reports a defect,” though it adds that the lender then “cannot conclude that a full-file quality control review has occurred.” D2-1-03 also lists what a significant defect must relate to, from the borrower’s creditworthiness and eligibility through property and project eligibility, the appraisal, life-of-loan representations, product terms, and the form and execution of required loan documents, and requires Fannie Mae to “give due consideration to the severity of the defect.” We have written on how to clear a collateral file exception before it kills a trade, where a document defect meets a different clock. The default trap is reading the demand letter as the designation. Which label the review produced, whether the loan sits inside the framework’s date, and which criterion the defect relates to are facts the review record and the purchase or pool issue date hold.

How long do you have to pay if you do not fight?

How long you have to pay a demand you do not fight depends on when Fannie Mae acquired the loan, and the two periods sit in the same topic, A2-3.2-01. For loans acquired “prior to January 1, 2013, the lender must pay Fannie Mae the funds that are due in connection with a repurchase or make whole payment demand within 30 days (or with its next scheduled remittance following the completion of the 30–day period).” For loans “with acquisition dates on or after January 1, 2013, the lender must pay Fannie Mae the funds that are due in connection with a demand for repurchase, indemnification, or make whole payment within 60 days after receipt of the demand or within such other time frame as specified by Fannie Mae unless an appeal is made.” The appeal is what suspends the payment.

Delay has its own consequence. “If a lender delays in this, or has a pattern of unresponsiveness, Fannie Mae may consider this a breach of contract and consider other actions against the lender, up to and including termination.” And a demand that goes to court carries fees: “Should Fannie Mae have to take legal action to enforce its right to require repurchase of a mortgage (or property), the lender will also be liable for Fannie Mae’s attorney’s fees, costs, and related expenses, as well as for any applicable consequential damages.” When that suit has to be filed is a separate question; we have written on when the statute of limitations on mortgage repurchase claims starts to run. The default trap is paying on the 30-day clock for a loan acquired on or after January 1, 2013, or on the 60-day clock for one acquired before it. The acquisition date, not the framework date, decides which sentence applies.

What does the first appeal have to contain?

The first appeal has to contain the whole case in one package, because the incorporated document requires the whole package at once and says a promise to complete it later does not satisfy the requirement. The appeal “must contain all supporting documentation related to the appeal at one time in one consolidated case file package, and identify in the appeal the section of the Guide and/or Lender Contract that supports the appeal,” and the lender is told that “[w]ritten notification of a lender’s intention to submit a complete appeal package at some future date does not satisfy the submission requirement.” The period is 60 days from receipt of the demand, though “Fannie Mae, in its discretion, may identify a shorter or longer appeal period in the demand based on circumstances at the time,” so the letter controls over the default. The obligation runs both ways: “If Fannie Mae fails to respond within 60 days of receipt of the lender’s appeal, Fannie Mae will have no further right to seek a remedy of the breach(es) identified in the demand, other than seeking indemnification for any third-party claims.” A second appeal is available where the lender “has additional material information,” within 15 days of the first denial, and draws its own 60-day response.

Correction is available during the appeal, and D2-1-04 sets its terms. “During the appeal and impasse processes, a lender has the right to provide a correction of any significant defect in the specified time frame and in the manner required by the Lender Contract,” and “[a]ny additional documentation or information that the lender provides is subject to the same standard of quality control review as the initial mortgage file documentation.” The documentation “must be based on information or data that either” was available at the time of underwriting “and no later than the note date” or “covers the time of underwriting so long as such evidence meets the applicable documentation requirements set forth in the Lender Contract.” A correction can be small: a “de minimis correction” is “a minor amount not to exceed $500 (or such higher amount as the lender and Fannie Mae may agree)” that resolves the defect when remitted, though it is not available where it “would result in a specific required minimum borrower contribution not being met” or “to correct a violation of Fannie Mae’s Charter requirements.” Fannie Mae then reassesses, and the topic lists four outcomes. The demand is rescinded or closed out where all significant defects were corrected, and reaffirmed where only some were. A loan-level price adjustment is due where the remaining defects make the loan a PAL, and the determination may be deferred where a title defect’s cure depends on a buyer or its title insurer. “At any time during the appeals process, a lender has the right to propose a repurchase alternative following the identification of a significant defect,” and Fannie Mae “will in good faith consider and respond.” The default trap is an appeal that argues a defect the Lender Contract would have let the lender correct. Whether a correction is available, on what documents, and inside what clock turns on the Lender Contract in force at delivery and the defect’s category.

What is impasse actually for?

Impasse is for the 30 days the documents give the parties “to attempt to resolve the dispute,” and it is the last stage at which the lender can add to the record. The lender “must initiate the impasse process in writing within 15 days of receiving Fannie Mae’s denial of the first or second appeal,” after which “Fannie Mae and the lender will have 30 days in which to attempt to resolve the dispute, unless both parties agree to a longer time period.” The rule that matters sits in the incorporated document: “All information, facts, and documents that the lender or Fannie Mae want to be considered in any subsequent IDR process must be submitted to the other party no later than the end of the impasse period,” and anything held back “will not be considered in a subsequent IDR proceeding.” Corrections are still available during impasse. If the parties agree, then within 30 days Fannie Mae “will rescind or withdraw the demand” or the lender must implement the agreed remedy.

Management escalation follows on the same rhythm and carries the same gate. The lender must initiate it “in writing within 15 days of conclusion of the impasse process by notifying its Fannie Mae officer contact,” and “[i]f Fannie Mae receives no written request for management escalation within the 15-day period following the impasse process, the lender will have no further right to challenge the demand and will be obligated to comply with its terms.” Fannie Mae “must involve an officer outside of the quality control group in a review of the dispute” within 30 days, the parties again have 30 days, and “[n]o new information, facts, documents, or corrections may be submitted during the management escalation process.” The default trap is a document first produced after impasse, because the neutral cannot consider it and the incorporated document bars a correction at escalation.

What does independent dispute resolution decide, and what does it not?

Independent dispute resolution decides one question, whether the alleged breach existed when IDR began, and it does not decide the remedy or anything else about the loan. The Guide puts the first half this way: “A neutral third party, selected by the IDR program administrator, will determine whether the alleged breach(es) existed at the time IDR commenced based on case file packages and subject matter expert reports submitted in writing by both parties.” The incorporated document puts the second: “[t]he neutral is not permitted to address remedies or any other issues either related to or arising out of the origination, sale, or servicing of a mortgage loan.” The award “will be final and binding upon and enforceable against the lender and Fannie Mae,” “may be entered and enforced in any court having jurisdiction over the parties,” and carries a short “written opinion briefly summarizing the reasons for the decision.” The process “will be case-specific and no award will apply or set precedent for other demands in any proceeding.” The process is governed by the Federal Arbitration Act.

The proceeding is built to be short, and its clocks are the incorporated document’s own. The lender opens it “within 15 days” of the end of management escalation by submitting an executed Retainer Agreement, which carries the administrator’s terms and “the parties’ waiver of the right to litigate the dispute, a tolling agreement,” and with which the claimant submits the filing and retainer fees, in amounts “identified in the Retainer Agreement.” The administrator provides “a list of five qualified neutrals” within seven days of initiation, after conflict checks; “[e]ach party may strike two names and rank the remaining candidates in order of preference,” within five days of receiving the list, and the administrator chooses from the strikes and rankings. An administrative telephone conference “should occur within 14 days of the date the neutral is selected, unless otherwise agreed to by the parties and the neutral.” The claimant submits its case file package “within 21 days” of that call; the respondent “within 21 days of receipt of the claimant’s case file package”; the claimant may reply “within 14 days,” in a reply “no longer than five double-spaced pages” and “solely to address issues raised in the respondent’s case file package”; and where the reply raises new issues, or at the neutral’s request, the respondent “may be allowed to file their own reply (not to exceed five double-spaced pages) within seven days.” A scheduling call follows within seven days of the respondent’s package, and any hearing “will take place within 21 days of the scheduling call unless there is an unavoidable conflict and the neutral, Fannie Mae and the lender consent to a brief extension that ordinarily should not exceed 10 days.”

The record is the record. Each side may bring a subject matter expert (SME). The package carries a position paper, and “[o]ther than the position paper and any SME reports, the information and documents provided in the case file package and during the hearing must be limited to information and documents previously exchanged in writing between the parties prior to or during the appeal process or the impasse process.” Neither side may cite how it, another enterprise, or another lender “might have dealt with similar disputes or issues on other mortgage loans in the past.” An SME may be in-house or outside counsel or staff, must be disclosed in the package with a written report of opinions, facts considered, exhibits, and qualifications, and may testify only to “information that has previously been shared in writing between the parties during the appeal or impasse processes” and to opinions drawn from it. The hearing, if either party or the neutral wants one, “will be conducted by telephone unless the neutral requests, or both parties agree to, a videoconference.” Each side gives “a brief summary overview of its positions,” the neutral asks questions, each party may question the other’s SME, with “[q]uestioning of any SME (not including any questions by the neutral)” limited “to 30 minutes,” and each side makes a closing argument. “No direct or rebuttal testimony will be permitted,” neither party “will be allowed to call its own witnesses for testimony,” “[d]iscovery is not permitted,” the process “does not allow either party to compel testimony,” and “[n]o other testimony besides a SME will be permitted, including authors or recipients of documents, even if those documents are relied on by a SME.” No post-hearing briefing runs unless the neutral asks for it.

The award comes “[w]ithin 21 days of the hearing (or if no hearing was held, within 21 days of the scheduling call).” If the neutral finds the breach existed, “the lender must comply with the terms of the demand within 30 days of the date the neutral issues its award”; if not, “the demand must be rescinded or withdrawn by Fannie Mae within 30 days.” The default trap is a case built for a courtroom. Witnesses to the origination, documents first assembled for the hearing, and a pattern argument about how the other side treats similar loans are all things the neutral may not hear in the standard proceeding; only a jointly agreed expanded proceeding “will include the presentation of witnesses subject to the other requirements of the IDR process.” What a given dispute can carry into IDR turns on what was exchanged in writing by the end of impasse and on whether an expert can speak to it from that record alone.

What does it cost to be wrong?

Being wrong in IDR costs a fixed sum the incorporated document sets, and both sides know it before they file. “[T]he cost and fee award shall be a fixed amount equal to 10% of the original principal balance of the mortgage loan in question at the time that Fannie Mae purchased it,” owed by the non-prevailing party to the prevailing party “within 30 days of the date the neutral issues its award,” and the amount “will be calculated accordingly and reflected in the Retainer Agreement.” The exception is agreed: where the parties “jointly agree to expanded proceedings, the cost and fee award will be the amount agreed to by the parties.” Below the award, the economics are split. “Each party will be responsible for its own attorney fees and costs incurred during the appeal, impasse, and management escalation processes,” “[e]ach party will pay its own costs and fees incurred in retaining any subject matter expert,” and “[t]he prevailing party will be responsible for any attorneys’ fees and costs it incurred above the cost and fee award.” The claimant fronts the filing fee and a retainer fee against the neutral’s and the administrator’s fees; if the claimant prevails, the respondent reimburses “the amount of the filing fee plus the combined fee less any retainer surplus.” Settlement before the first case file package waives the award, and the parties then “agree who has the obligation to pay any costs of the IDR program administrator and the neutral.” Nothing pauses meanwhile: “All fees, costs, and delinquent or default interest due on a mortgage loan will continue to accrue throughout the appeal, impasse, management escalation, and the IDR processes,” payable within 30 days of the award if the neutral finds the breach. And the award is not the ceiling for a lender that does not comply: where Fannie Mae “incurs any fees or costs in enforcing the related award of the neutral, the lender must reimburse such actual fees and costs to Fannie Mae within 45 days of receiving any request for reimbursement,” and a failure to do so “will constitute an independent breach of the contract between the parties.”

Winning settles the loan, not the relationship: the process “will have no impact on Fannie Mae’s rights regarding any actions (other than with respect to a specific mortgage loan as determined by the IDR process) Fannie Mae may independently take with respect to a party Fannie Mae believes is responsible for a breach, including, without limitation, the suspension or termination of a lender’s eligibility to do business with Fannie Mae.” In our view the fixed award is what makes IDR a pricing decision as much as a legal one. It is the same number for a weak appeal and a strong one, and it is set against original balance. The default trap is deciding to initiate on the merits alone. Whether the award is worth risking turns on the particular loan and on the record that closed at impasse.

Who is not allowed into IDR?

A lender is not allowed into IDR when it has lost its standing with Fannie Mae or let an earlier gate close, and a demand outside the program’s scope is not allowed in either. The incorporated document opens it to “lenders that have not been suspended, disqualified, or terminated by Fannie Mae,” and says that lenders “that have received a formal notice of default from Fannie Mae are not eligible,” that a suspension, disqualification, or termination “is not subject to the IDR Process,” and that the right to participate “cannot be assigned to another party, such as an insurance company.” It also bars a lender that “has failed to comply on a timely basis with an IDR award,” one that “has failed to comply on a timely basis with any demand after the time for challenging the demand” through the ladder “has expired,” and one that “has any outstanding amount past due to any IDR program administrator.” A lender may initiate “only if and when the dispute remains unresolved after conclusion of the management escalation process”; Fannie Mae may initiate on the same condition “or upon the lender’s failure to challenge a demand as required at any stage,” and where the lender has neither initiated IDR by the 15-day deadline nor complied with the demand, the Guide gives Fannie Mae “the option of either initiating the IDR process within 6 months of the end of the management escalation period or pursuing other remedies.” Litigation is the alternative, and it closes the door once chosen: IDR “is not the sole means for resolving disputes about demands,” “[n]othing prohibits either party from initiating litigation to resolve a demand dispute prior to commencing IDR,” but “[n]either party may initiate the IDR process if either party has previously initiated litigation of any kind to resolve the demand dispute.” The bar runs the other way too: once one party initiates IDR, “the other party may not initiate litigation with respect to the subject demand(s) until the IDR process is complete and then may only initiate litigation if the non-prevailing party fails to comply with the neutral’s decision in a timely manner.”

Scope is a gate too. The Guide says IDR “may be used for” demands for breach of a selling representation, warranty, duty, or responsibility on “whole loans purchased, and mortgage loans delivered into MBS with pool issue dates on and after January 1, 2016,” and for “demands relating to servicing remedies issued on and after December 1, 2016.” A correspondent that sold the loan to the lender “may not initiate IDR,” may participate “with the lender’s consent” once “an acceptable confidentiality agreement” is executed, and the award issues to the lender, which must comply “notwithstanding any dispute it may have with the correspondent, including the correspondent’s failure to reimburse the lender.” The default trap is a lender that discovers its ineligibility at the Retainer Agreement, with 15 days running. Whether the door is open turns on the lender’s standing with Fannie Mae, its compliance history with earlier demands and awards, the loan’s purchase or pool issue date, and whether anyone has sued.

The calendar closes the record before the merits are heard

A Fannie Mae repurchase request is decided, in our view, by the record that closed at impasse and by whether every gate before the neutral was kept. The proceeding at the top hears nothing built on anything else. The answer turns on what the review record says, what the Lender Contract in force at delivery allows, and what had been exchanged in writing when impasse closed, and that is the work.