Optimizing Loan Quality in a New Market Dynamic

In the past few years, we have witnessed significant change in the housing market. The pandemic sent employees home, rates down to record lows and mortgage volumes skyrocketing. Over the last year, those conditions have almost completely reversed: many are back in the office, rates are at 20-year highs and origination volumes have dropped considerably. For the first time in several years, we find ourselves primarily in a market focused on home purchases, not refinances.

In the far more complex purchase market, loan quality is of paramount importance. Our own research found that purchase mortgages generally have 35% more incidence of defects than refinancings. As we transitioned into a purchase market this research proved accurate, as loan defects rose to levels we have not seen in years.

At Freddie Mac, the volume of loan defects identified on incoming loans we purchase, also known as Non-Acceptable Quality rates, reached a high point in the third quarter of 2022. As a consequence, repurchase requests on those defective loans peaked in first quarter of 2023. The top factors driving these levels higher were loans missing key documents or those with inaccurate income calculations. 

To address these issues, Freddie Mac committed to enhance our communication, collaboration and feedback with our lenders and industry partners. We also committed to enhancing our own processes. We did both, and it is working.

We are now seeing a definitive improvement trend at the halfway point of the year. In fact, Non-Acceptable Quality rates on our incoming loans are approximately 30% lower than their peak. With it, repurchase requests are trending down to approximately 60% lower than their peak. Within that 60%, repurchase requests to vitally important small and community lenders are even lower, down 68%.

Freddie Mac was able to make these strides for several reasons. First, lenders are improving file quality and the effectiveness of their quality assurance function. Second, at Freddie Mac we have and will continue to improve the quality control review process to ensure outcomes are consistent, reasons for defects are well-defined, and feedback is reported clearly to lenders. Finally, based on what we are learning through loan reviews and industry feedback, we are advancing policy changes that will minimize instances where judgment must be applied in the underwriting process.

We’re proud of the progress we have made in the past year to improve collaboration, reduce defects and minimize repurchase requests. But our work is far from complete. For example, we currently are exploring repurchase alternatives for certain loans.

We are committed to enhancing this constructive, collaborative effort with lenders to ensure a strong housing industry that can support sustainable homeownership. To be clear, we fully expect lenders to continue to do their part to keep improving loan quality. Further progress on this front will make sure we are in the best position to make home possible — no matter what economic conditions we face.