Avoiding Repurchase Requests and Reviewing Recent Loan Performance
In the wake of the subprime mortgage crisis, mortgage lenders have seen significant volumes of repurchase requests from Fannie Mae, Freddie Mac and other investors.
To help mortgage lenders keep loans sold and deal with loan buyback requests, the New England Mortgage Banking Conference will feature a workshop on the topic on Thursday, September 20.
While scrutiny of loans may be heightened across the board, data has shown recent loan quality has been strong.
As an example, Fannie Mae's second quarter financial report noted that as of June 30, it had issued repurchase requests for less than 0.25 percent of its single-family loan portfolio acquired after 2008. In contrast, more than 2 percent of single-family loans acquired between 2005 and 2008 were subject to a buyback request.
However, each repurchase request presents a challenge for mortgage lenders, making preventing them vital to the success of mortgage businesses. While there a number of potential "triggers" which may lead to a repurchase request, avoiding some of the major loan faults is a good base position for new loans.
Verify Fraud Checks - Mortgage fraud, particularly in regards to foreclosure, has spiked considerably in recent years. Despite heightened awareness, red flags still make it through the origination process. Larry Avery, of Birchwood Credit Services, Inc., stated that rising exposure to repurchase risk from mortgage fraud activity has become a growing topic of discussion for Birchwood clients.
Mr. Avery said that both income and liability misrepresentation has increased from 51 percent to a total of 61 percent of total misrepresentation type over the last two years, according to recent data from Fannie Mae. As recently as 2010 no New England area was included in Fannie Mae's fraud findings Top 10 statistics. However, in 2012 the Boston area joined historically high fraud regions like Chicago, New York and Los Angeles when depicting loans with misrepresentation, demonstrating the growing problem for the New England region.
Focus on Appraisals - Appraisal-related issues are another source of repurchase requests. While buyback requests should not be based on appraisal issues linked to shifting home prices, mortgage lenders should ensure the data included in loan files accurately reflects the appraiser's stated opinion.
Borrower Verification - With current credit rating standards, some potential borrowers may be inclined to omit debts or exaggerate income when submitting an application. Identifying any red flags in the review of borrowers' 4506-T forms or mortgage credit reports can reduce repurchase risk.
Future changes in the industry may also have a significant impact, with the Consumer Financial Protection Bureau's qualified mortgage and qualified residential mortgage rules still pending. The Federal Housing Finance Agency has also noted that it plans to issue buyback guidance this fall.