Fannie Mae, the largest provider of residential credit in the country, today said it is stepping up efforts to help lenders identify defective loans amid signs quality is falling short.

The government-backed company said it will stop more loans with defects from being sold into its guaranteed bond program under an initiative to help lenders reduce their liability.

The move follows Fannie Mae and rival Freddie Mac’s demand that lenders repurchase billions of dollars in loans bought by the two companies. The companies claim the loans failed to meet standards. This tension has caused confusion among lenders over what may cause a repurchase request and a tightening up on required documents provided by consumers.

Four years after the peak of the housing boom, lenders have not adequately improved the loans sold to Fannie Mae, which together with Freddie Mac funds the lion’s share of mortgages originated, Fannie Mae said in a quarterly newsletter.

"Fannie Mae has seen less improvement than might be expected, which remains a big concern for us," Steve Spies, a vice president in Fannie Mae’s single-family mortgage business, said in the newsletter.

Spies said that overall creditworthiness has improved, but the accuracy of data and evaluation of underwriting data "remain a challenge for many lenders."

Fannie Mae’s "loan quality initiative" will supplement its reliance on the representations and warranties that lenders offer when selling loans, Spies said.

Representations and warranties often lead to discovery of errors only after the loans have been sold to Fannie Mae, he said.

The loan quality initiative "will facilitate early discovery, and help lenders have more certainty about repurchase exposure," he said.

Among checks, Fannie Mae beginning Jan. 3 will change some of its "warning edits" to "fatal edits" that will stop its purchase of a loan. The fatal edits include when the loan’s expected loan-to-value ratio varies from what is delivered. (Reuters)