Anticipating the future impact of a current decision is an art and skill. Wayne Gretzky said it best: “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.”
Owning and operating a mortgage bank is no difference. To be highly successful in a fast moving and changing environment, one must anticipate the impact of current regulatory, investor and interest rate changes. How will these changes impact how we do business in the future? What steps today should we take in anticipation of the results we expect from these changes?
In November, MND alerted the mortgage masses that the GSEs were strictly enforcing lender repurchase agreements. Over the weekend, an article in the Wall Street Journal drew more attention to the issue. The essence of the article focused on FNMA and FHLMC requiring lenders to repurchase defect loans that are over 90 days delinquent. The two lenders mentioned in the article where Bank of America (they purchased Countrywide Funding) and JP Morgan, (they purchased Washington Mutual).
The article talked about the largest lenders repurchasing loans from the GSEs, but it didn’t address the real impact. As these two large lenders receive repurchase requests and “make whole claims” from the GSEs, they will begin making the same requests to their customers, small to mid size mortgage bankers and mortgage brokers. You see, both lenders generated a large share of their business in the past from correspondent and wholesale channels. Some brokers and bankers may have already experienced an increase in conforming loan paper repurchase requests. Based on this article, it appears we may see an uptick in loan repurchase activity of GSE eligible loans.
We’ve talked about the “trailing repurchase risk” for two years as the subprime and Alt-A business imploded. As more A-paper borrowers mail the keys back to lenders because they’ve lost jobs and/or saw their equity drop below the price they paid for a property, loan repurchase request will pick up for bankers and brokers.
So what can an operator do in anticipation of an increase in repurchase requests and potential losses resulting from these requests?
Here are some ideas:
- Review your past book of business and separate potential loans that have high repurchase risk. Look at characteristics such as document type, loan type, occupancy, credit scores and LTVs. Anticipate what loans have the highest potential to end up in default.
- Review the score cards from each investor to see what types of loans are over 90 days and longer. Overlay the score cards onto your book of business to help make some predictions.
- After you have an idea on what the potential losses might be, start reserving some of your profits for a raining day. If you believe you have some trailing risk, use some of your profits today to pay for future losses in the future.
We’ve helped many companies identify their trailing risk and develop a strategy to attend to the resulting losses. We agree with Wayne Gretzky that a great hockey player plays where the puck is going to be. Smart mortgage bankers and brokers are anticipating the impact of the GSEs increase in loan purchase activity and developing a strategy to mitigate the financial impact on their company.
