Not too many years ago I was consulting companies that were plagued with early purchase defaults and repurchase demands from investors. It was during the tail end of the subprime and Alt-A era that mortgage bankers were starting to see a dramatic increase in demands from investors.
Between 2005 and 2007 everyone got caught originating products that shouldn’t have been offered to most borrowers. When we asked folks why they were doing it, a common response was, “ I know these products are not high quality, but if I don’t originate them, I’ll be out of business”. Many would add, “All my competitors are originating these loans, so it must be ok.”
In the end, these folks and their competitors went out of business anyway.
One of the issues I uncovered during this period was a lack of a proper procedure in managing early payment defaults (EPDs), loan repurchase request and Early Payoffs (EPOs). The large bank owned aggregators have “well oiled” processes that put much of the responsibility on mortgage bankers for any loan level issues that might result in delinquencies or foreclosures. To effectively manage and defend a loan repurchase request, mortgage bankers need a detailed Loss Mitigation Process.
Let’s look at some of the key components:
- When a loan repurchase letter arrives, first determine if you are responsible for making the investor whole/required to repurchase the loan. This would include a detailed review of their purchase agreement’s reps and warrants. It also included reviewing key deadlines such as the funding and settlement dates and the number of months covered under early payment defaults.
- Do a forensic review of the file, including a new appraisal. Re-underwrite the file and validate all the data and information. Determine if there was a product or underwriting defect. And do a thorough review to see if there was any borrower, Realtor or loan officer fraud or misrepresentation.
- Order servicing records from the investor and determine if servicing process and procedures were substandard. Poor servicing procedures can sometimes cause confusion with borrowers, creating a late or missed payment.
- If you have a good defense, push back and don’t give in. You may have to hire an attorney to help you push back more forcefully. Remember the Loss Mitigation Departments of these investors are going try anything to reduce and mitigate losses to their Company. Even if they are wrong, they may try to threaten and strong arm you.
- If you don’t have a good defense and the investor has a strong case, prepare for the worse. Determine the value of the house and estimate the amount of loss if you had to make the investor whole. You might consider repurchasing the loan, but most mortgage bankers don’t have the liquidity to finance a delinquent loan or REO. Most mortgage bankers attempt to negotiate a settlement with the investor and have them manage the foreclosure and REO process
- Most investors today don’t want a mortgage banker to be forced into bankruptcy over repurchase loan issues. They would rather keep a company intact and exhort some of the profits from them over time to offset their losses. Many investors will negotiate a settlement lower than the actual loss and require payments over time. The payments are made by the investor “clipping” the mortgage bank some of the gain-on-sale at loan settlement. Under these settlements, investor requires a commitment from the mortgage banker to deliver new production over a period of time. Does this sound like extortion?
We ask owners/operators during every FOCIS-plus review whether or not they have a written loss mitigation process. This process should include the key components listed above and it should detail the time frame for each process. Regardless of the amount of quality control and underwriting review, some borrowers are going to default. When borrowers default, investors are going to try anything to reduce and mitigate losses. You also need to put processes in place a process to mitigate your losses as well.