No undue risk! Freddie Mac’s Sonu Mittal on new buyback remedy, appraisal waiver extensions

When asked whether loan buybacks were a more significant issue last year than now, Freddie Mac executive Sonu Mittal says emphatically, “It depends on who you ask.”

Freddie Mac has seen a nearly 55% reduction in repurchase requests from its peak in the first quarter of 2023 and a decline of 20% in actual buybacks of performing loans quarter over quarter in Q3 2024. But public filings analyzed by Inside Mortgage Finance, which considers repurchase requests and actual repurchases of performing and non-performing loans, revealed an increase to $430 million in Q2 2024 — up 29% from the previous quarter.

This context frames the recent announcement from the Federal Housing Finance Agency (FHFA), the enterprise’s regulator, that all approved lenders will be able to access a fee-based alternative for repurchasing Freddie Mac performing loans with defects. This expands upon a pilot program launched earlier this year.

In an exclusive interview with HousingWire, Mittal — the head of single-family acquisitions at Freddie Mac — said that the fee-based alternative will remain relevant in any mortgage rate environment as the enterprise “wants to incent lenders to improve their manufacturing quality.” The new model also provides economic benefits to lenders, according to Mittal.

“If you are not a depository or a bank, you typically don’t have a balance sheet, so you have to sell that loan in the scratch-and-dent market, which was costing last year 15 to 20 points — and even now it’s still costing anywhere between 5 to 8.5 points,” Mittal said. “In a $200,000 house, it could mean up to $17,000. That’s very relevant.” 

Mittal spoke to HousingWire this week during the Mortgage Bankers Association (MBA)’s Annual Conference and Expo in Denver.

According to the program rules, instead of repurchasing defective — but performing — loans within the first 36 months after origination, lenders pay a fee based on the defect rate of their performing loan deliveries to Freddie Mac on that quarter’s aggregate loan balance.

Mittal explained that lenders can opt into the program for 2025. In this case, the fee is applied to their overall quarterly unpaid principal balance (UPB) production delivered to Freddie, varying according to their non-acceptable quality (NAQ) rate.

“If you deliver $2 billion in a quarter, we look at your non-acceptable quality rate, and wherever your NAQ rate is, we determine the tier on how much of a fee you will need to pay. This will all be disclosed to lenders,” Mittal said. ”If the NAQ is less than 2%, there’s no fee.” 

If lenders opt out, a new fee-only option will be applied on the loan level, but in a way that benefits lenders in comparison to repurchasing the loan and selling it on the scratch-and-dent market with a large discount, according to Mittal. 

“Our goal is, how do we allow the lenders to focus on the borrower or serving the needs of the borrowers or homeowners, while also having them not deal with the dynamics of the scratch-and-dent market, in which the cost could be much higher for the lenders?” he said. 

Other initiatives

Regarding another initiative announced Monday — the extension of appraisal waiver methods for higher loan-to-value (LTV) purchase loans — Mittal clarified that Freddie Mac is not “taking undue risk” but is maintaining the system’s “safety and soundness” and “leveraging data responsibly.” 

In a social media post, former FHFA Director Mark Calabria called the decision “truly dumb & irresponsible.” 

The changes raise the maximum LTV ratio from 80% to 90% for appraisal waivers, and from 80% to 97% for inspection-based appraisal waivers on purchase loans, consistent with refinance guidelines. 

When asked about differing risk levels between purchase and refinance transactions, Mittal said that “it all depends on the overall characteristics of the loan,” meaning “collateral or appraisal value is only one variable within the whole equation.” 

“Another thing to keep in mind is that we’ve been doing appraisal waivers for years across Fannie and Freddie; we have a lot of data that shows us how the performance is for loans with appraisal waivers versus those which don’t have appraisal waivers. So, we went through a massive amount of diligence before we decided to expand it.” 

According to Mittal, the changes will go into effect by the end of the first-quarter 2025.  Freddie Mac estimates that its automated collateral evaluation (ACE) program has saved borrowers $1.63 billion in appraisal fees to date.

Feedback for LOs

Freddie Mac is also enhancing its Loan Product Advisor (LPA) automated underwriting system with LPA Choice. Through the new tool, loan officers have access to tailored information about purchase requirements, which is expected to reduce the number of resubmissions, save time and improve the acceptance rate of qualified borrowers. 

“What this enhancement does is specific to three areas: debt-to-income ratio, reserves and loan amount. Those are the three areas that we are giving a more prescriptive message to the loan officers,” Mittal said.

“This is what could potentially help you get this borrower from caution to accept or qualify. We are not expanding our credit box; it’s just allowing you to have more insight on how to help borrowers or homeowners.” 

Previously, Freddie Mac had included on-time rent payments, cash-flow information and trended credit data as part of the risk assessment process. Mittal said the idea is to allow “credit-invisible borrowers” to have access to mortgages. 

According to Mittal, the solution helps because “there are a lot of funds that go unused.” He added that “there are loans that we are willing to buy, but that are not structured in a way that we can.”