Lack of Quality Control & Loan Defect Resolution Causing GSE Loan Repurchases & Buybacks
Written by: Bill Dolan, CMB, AMP
Remember how everyone basked in the sun of 2020’ and 2021’ with the greatest mortgage volume in history? Well, the chickens have come home to roost, and it appears in many cases, it’s time to pay the piper!
If you are not aware, the GSEs (Fannie Mae and Freddie Mac) have been on a tear lately requesting repurchases and buybacks causing a major problem for lenders and their balance sheets.
The cause stems from the years 2020’ and 2021’ when rates were historically low and volume was at an all-time high building capacity that resulted in a greater amount of underwriting errors that the agencies are still uncovering through their Quality Control areas – months and sometimes years after the loan was originated and sold into the secondary market. Buying a loan back for independent mortgage bankers (especially if small or mid-size) is critical, for the majority don’t have the capability to retain loans on their balance sheets and therefore, have no other alternatives but to head to the whole-loan market to sell them at a loss. Banks and credit unions who are requested to repurchase loans from the agencies often take the approach of just placing the loan back into portfolio as non-saleable but, is that the right approach?
The reason that the repurchase or buyback is being requested, stems from the defects that Fannie Mae and Freddie Mac are uncovering in the areas of debt-to-income ratios, appraisal issues, employment verifications, missing documentation, and undisclosed liabilities. Both the appraisal and income issues appear to be the greatest cause for the bulk of repurchases today.
As stated within their guides, the GSEs have up to thirty-six (36) months from the date of the origination of the loan, to demand a loan repurchase, and, if fraud is involved with any loan, even longer. It appears that the agencies are still working through 2021’s loan reviews.
Lenders are attempting to determine whether the GSEs have expedited their quality control review process or whether they are pushing the envelope and forcing more repurchases.
The MBA has even taken a recent position that there are “concerns over the reps and warranty framework for loan repurchases for minor loan manufacturing defects in the areas of credit history, income, or LTV ratios that fall far shorter than fraud, misrepresentation, or liability issues.
Being in a 7.00% market currently is no time to repurchase a 2.75% - 3.00% loan back for resale to the whole sale market or for portfolio. One would think that addressing a price adjustment on these loans would eliminate the buyback and resolve the problem between the lender and the GSEs.
The bottom-line in my opinion is improving your loan quality from the get-go and prior to any loan being retained for portfolio or for sale to the secondary market.
Ask yourself the following question. If the loan does not meet secondary market quality control standards, why should my institution be saddled with a low interest loan sitting in my portfolio for possibly the next thirty years as non-saleable? Just how deep a dive is your QC staff performing their due diligence analysis for potential defects through the Pre-Funding QC or Post-Closing QC process? If you’re not sure, are you really willing to take the chance and can you afford to take the chance, on a potential buyback or future repurchase? What are your trending reports telling you? Are the results being fully communicated to you, the rest of your executive team and to your Board?
For 32 years, Spillane Consulting Associates, Inc. has been there as your most trustworthy partner through all times and types of cycles, for both people and businesses in our industry/ community. This has allowed SCA to reach more prospects and clients and to develop both new and long-term relationships.
Today, there is not an institution out there not looking for ways to reduce expenses while remaining compliant. Why not outsource some of these daily functions to reduce those costs and utilize staff in other much-needed areas? Face it, the hours you are paying full-time employees versus the work actually being performed due to this current cycle, allows you to build internally, those areas that may need far more attention. Now is the time to focus on those areas. Less headaches, more solutions. Avoid those loans that are non-saleable, potential repurchases or buybacks NOW.
To learn more about SCA’s Quality Control Analytics team and the services they perform in the areas of: Pre-Funding, Post-Closing, and the Appraisal Review services they perform, contact Bill Dolan, Director at (617)694-2617 or email Bill at: Wdolan@scapartnering.com. View SCA’s website at: www.scapartnering.com to learn more about SCA’s consulting services we provide in the areas of: Strategic Planning, Budgeting, Operational Assessments, Compliance, Technology, Loan Servicing, Asset Purchases & Sales, Due Diligence and Credit Reviews.
