While purchase prices remain below their 2022 peak, they are still elevated compared to pre-pandemic levels. The additional fees pour salt into the wounds of credit unions, banks, and private bankers, which are already recording an average pre-tax loss of $534 per loan origination. This challenging environment, marked by high operating costs and low origination rates, has forced lenders to work less than ever, as evidenced by reports from the Mortgage Bankers Association that private mortgage bankers are cutting their sales and non-sales staff by 44% by 2022. . Determining headcount helps reduce costs, but it also introduces energy constraints and burnout — factors that increase the risk of costly human errors.
In this context, the financial consequences of mistakes are dire, and the thought of buying a home loan is too close to lenders who fail to manage risk proactively. In this situation, strategies to reduce the risk of repurchases – through technology, precise quality control, and strong cooperation – are essential to avoid serious financial and reputational collapse.
The cost of a bad hand
When selling a loan, lenders provide legal guarantees to government-sponsored enterprises (GSEs) that ensure the accuracy and completeness of the loan data, known as representations and warranties. These guarantees include the borrower’s income, employment, and property information. If lenders or their technology providers fail to maintain a high level of data accuracy, loan defaults increase.
Just as the flop is revealed only after the first bet in Texas hold’em poker, mistakes occur after the stake has been sold—and can make or break profit margins. A mortgage repurchase, often called a repurchase, occurs when the loan sold to the investor or the GSE fails to meet agreed upon written, legal, or regulatory standards. Whether the dispute is introduced by faulty technology, clerical errors that pass quality control, faulty documents, misrepresentations, or omissions, the GSEs can demand that the lender repurchase the loan from its unpaid principal balance, resulting in significant financial losses covered only by law. fees, reputational damage, and strained investor relations harming lenders’ futures and market positioning.
Loan purchases also hurt investors by introducing volatility and diminishing returns. And while borrowers aren’t directly involved in the repurchase process, they often feel its ripple effects in the form of tightened standards, increased payments, or increased interest rates. Minority and first-time homebuyers are equally affected by this reduced access to affordable credit.
Don’t fold yet
Rather than walking away from the table, lenders, technology providers, investors and GSEs are looking for solutions to reduce risk. While technology providers are focused on increasing data accuracy to help lenders more effectively access reps and warrants, Fannie Mae and Freddie Mac have begun exploring alternatives to the repurchase process. Freddie Mac is testing another fee-based repurchase method with a pilot program that could significantly reduce costs to lenders if a small error is found. Fannie Mae has taken steps to renew advance notices of impairment for “potential” loan errors, giving lenders more time to correct errors without facing immediate repurchase requirements. Such programs offer lenders other ways to resolve issues, lower costs and lower repurchase rates.
Despite these developments, refinancing costs are still a major concern for many lenders. In July, The Mortgage Collaborative, a collaborative network of private mortgage companies, banks, and credit unions representing approximately 10% of total US mortgages, announced the launch of a Repurchase Request Tracker that allows members to register all repurchase requests. This data-gathering effort highlights ongoing industry concerns and shows that buyback requests are far from extinct. Buybacks are often driven by:
- Loan errors: An accuracy related to the borrower’s income, assets, or employment that was not captured at the time of underwriting.
- Documentation issues: Missing or insufficient documents.
- Fraud: Fraud by third parties or insiders is particularly problematic, prompting immediate action by investors.
- Typing errors: Loans that fail to meet GSE or investor standards, due to oversight or system process problems.
What’s on the cards?
Over the past two years, repurchase rates have been on the decline, but recent data indicate that a rebound may be possible. In Q1 2024, default rates across all loans saw a slight increase, ending five consecutive quarters of decline. Although low by historical standards, the increase is notable given the reduced loan volume during the quarter. Income and employment data—the leading category of disability—showed significant improvement, but other areas saw worrisome setbacks.
In Q2, Freddie Mac retailer repurchases increased to $430 million—a 29.1% increase from Q1. In contrast, Fannie Mae dealers repurchased $268.5 million in delinquent loans, marking a 27.7% decrease in repurchases over the same period. This discrepancy is drawing attention to the industry, as one mortgage executive lamented to HousingWire, “Freddie Mac’s foreclosure problem has increased 10x. Our requests are increasing by 100% month after month.”
Put it on your deck
Lenders have tools at their disposal to reduce repurchase risk, but success requires effective risk management strategies. There are three key steps lenders must take:
1) Start with quality control
The most effective way to combat repurchase risk is to improve loan quality from the outset. Lenders should invest in rigorous pre- and post-closing audits, conduct comprehensive employee training, and implement consistent underwriting standards. The increase in credit errors and compliance errors shows that quality checks are important. Automated compliance tools can also help lenders catch mistakes early, flag potential problems, and ensure loans meet investor and GSE guidelines before they hit the market.
2) Use Automation to Stay Ahead
Lenders can use automated tools to verify data and get reps and easement warranties where they come from, which greatly reduces repurchase risk. For example, home value reps and warranties are waived on some loans if the appraised value closely matches the estimate generated by the GSEs’ automated valuation model (AVM).
Additionally, GSEs will not enforce multiples and guarantees on assets, employment, or income if properly verified through an authorized service provider, such as Argyle. Checking the list of authorized Fannie Mae dealers and Freddie Mac service providers is a good start, but lenders should be aware that even authorized dealers vary greatly in data accuracy, which also directly affects the frequency with which reps and warranties are provided. Therefore, instead of evaluating vendors solely on their GSE accreditation status, lenders should ask how the technology provided results in reduced repurchase risk.
3) Promoting Open Communication with Investors
Transparency and collaboration are critical to managing repurchase risk. By maintaining open lines of communication with investors, lenders can better understand emerging expectations and avoid default triggers. Partnering with third-party quality control providers can also help strengthen investor relations. By providing targeted guidance, ensuring loan quality at all stages of the process, lenders reduce the risk of reputational damage caused by repeated mistakes.
Go all in to reduce the risk of repeat purchases
Despite the downward trend in overall purchases, the recent increase in critical delinquencies shows that mortgage lenders cannot afford to be complacent. Reducing repurchase risk requires a focused approach, which includes effective quality control, the latest technology tools, and strong investor relations. Lenders may soon be able to get relief from the financial burden of regular repurchases through other GSE repayment methods—but only if they maintain high loan quality standards. In fast-moving markets, there is no room for hesitation—only practical, strategic action will ensure long-term success.
By John Hardesty, EVP of Mortgage, Argyle.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the editor responsible for this piece: [email protected].
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