SitusAMC's "In Conversation" Podcast Examines Growing Repurchase Demand by Mortgage Investors and the Fallout for Lenders and the Industry
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New York, NY – Repurchase demand by mortgage investors is growing sharply, creating significant financial losses for lenders, according to the latest episode of SitusAMC's "In Conversation" podcast series. Justin Vedder, president of Securent Risk and Insurance, a SitusAMC subsidiary, speaks with Rob Chrisman, consultant and publisher of the Chrisman Commentary, a daily industry snapshot and podcast; and Mike Fontaine, co-president and COO of Plaza Home Mortgage, based in San Diego.
Vedder, Chrisman and Fontaine discuss the roots of the problem, its impact on lenders and the industry, and strategies to prevent and manage the growing risk. Listen to the episode here.
The massive surge in origination volume in 2020 and 2021, coupled with the sudden shift to a work-from-home environment during the Covid-19 pandemic, led to more underwriting errors. "Building the systems and the people capacity to deal with that explosive growth really was the spark of the problem," Chrisman explained.
Investors have become more aggressive in pursuing repurchase demands, even for performing loans with minor defects. This may be the tip of the iceberg: Under most agreements, investors have up to 36 months to review loans purchased, so they may uncover defects months or years after loans were originated. Chrisman estimated that about 50% of loan repurchase requests result in buybacks.
The repurchase problem is exacerbated by rising interest rates. "A lot of those loans were originated around 3%, but today rates are in the upper 6s," Fontaine said. This rate differential creates significant losses for lenders who must buy back loans, fix them and resell them into the scratch-and-dent market. Lenders are taking losses of 30% and more on these loans.
Vedder, Chrisman and Fontaine also discuss:
Specifics on Errors and Defects: Issues with income, appraisals, employment verification or missing documentation are largely driving repurchase demand. But it also arises from borrower blunders that occur just before mortgage closing -- such as taking out a car loan or changing jobs and being unemployed for a few weeks -- without informing the lender, which amounts to fraud. Overt fraud occurs as well.
A Cascading Effect on Mergers and Acquisitions: Buyers are now cautious about overpaying and may discount the value of a firm or impose holdbacks to mitigate repurchase risks.
Ways Lenders Can Reduce Risk: Defect insurance, such as Securent's certified loan program, limits sellers' exposure in the event of manufacturing defects and fraud. Instead of the 30%+ losses that other lenders face selling mortgages in the scratch-and-dent market, Plaza's clients pay a small deductible plus an amount over par in the event of a repurchase.
Insurance programs also provide helpful feedback on manufacturing quality shortly after origination, giving lenders a chance to improve outcomes and reducing the chance of future defects. "Owners of the IMBs in particular find the program very valuable (for) protecting their net worth, minimizing their requirement for loss reserves, and giving them some peace of mind," Fontaine said.
SitusAMC's In Conversation podcast series provides invaluable analysis and insights for market participants seeking to stay informed and competitive in today's quickly shifting business environment. Part of SitusAMC's thought leadership platform, this podcast underscores the firm’s commitment to powering the lifecycle of real estate finance.
SitusAMC (www.situsamc.com) is a leading independent provider of technology, strategic outsourcing, talent and advisory solutions to the commercial and residential real estate finance industries. The company helps clients identify and capture opportunities in their real estate businesses through industry-leading services and innovative technologies that drive operational efficiency, increase business effectiveness, and improve market agility across the entire lifecycle of their global real estate activity.
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