In my travels around the country I have come to find that mortgage shop owner/operators see repurchase risk and delays in the loan purchasing process as their highest concern. We’ve commented many times in the past that net profits generated from 100 loans can be eliminated from the losses sourced to one repurchase request.
Don’t believe me? Let’s take a look at an example:
|Average loan amount:
|Net profits from each loan:
|25 basis points (this is about average over a 10 year period for mortgage bankers)
|$62,500 on 100 loans
|Repurchase Loan scenario:
|FHA loan with fraud goes into foreclosure. Original appraisal over stated value. Property ends up as an REO and a 30 points cost to liquidate property. Investor sends a bill to mortgage banker for shortfall
Is this scary or what? Today mortgage bankers understand explicitly the risks associated with writing loans. Most have implemented extensive pre-funding quality controls, loan officer and TPO management policies, plus they've added numerous credit overlays to further mitigate credit risk.
Recently I came across a new strategy aimed at addressing repurchase concerns. It is called “Triple Risk”.
The company that came up with the idea of "Triple Risk" provides loan officers with a tight set of standards to operate around. New production must meet specific credit guidelines before the file can even be turned over to processing. If a loan violates any three of the following metrics, one of the two managers must review the file before it can be moved onto processing. Similar to an exception or variance.
Here is the list:
- LTV over 90%
- Credit Score below 680
- Total DTI above 41%
- Ratio above 36%
- Past Bankruptcy
- Non owner occupied
The owner of this operation says the "Triple Risk" strategy has almost eliminated EDPs and loan repurchase requests. What are you comments on this practice?