The Growing Repurchase Concern
Mortgage industry experts are concerned about loan repurchases among independent mortgage banks as mortgage originations have declined.
High Stakes for IMBs: Loan repurchase rates are a critical issue for IMBs. IMBs that are required to repurchase low-rate loans from 2020 or 2021, even with minor defects, face challenges in the current rate environment if they attempt to sell these loans through the whole-loan market. This situation compounds the financial woes of IMBs, as most reported pre-tax net losses on each loan originated during 2023.
Ongoing Concerns: Despite a reduction in total originations, loan repurchases have seen a disproportionate increase in activity. The Mortgage Bankers Association (MBA) reports that repurchase requests, often involving appraisal or debt-to-income issues, continue to impact IMBs. Increased losses from repurchase activity could force IMBs to increase fees to offset losses, which results in charging more to borrowers that Fannie and Freddie are encouraged to support, such as first-time homebuyers and low- to moderate-income borrowers, despite the fact that higher costs are surfacing because of GSE repurchase demands.
Fannie and Freddie's Perspective: Fannie Mae and Freddie Mac, overseen by the Federal Housing Finance Agency (FHFA), have a complex role in this situation. Experts suggest that they have been working to improve loan quality by collaborating with industry partners. Nevertheless, concerns persist related to the GSE's rigorous approach to expose minor underwriting defects that likely could be addressed without requiring a loan repurchase.
Uncertain Future: The concern is that repurchase rates are rising and will continue to climb as going-concern speculation may drive the GSE clawback focus while the sellers retain the financial wherewithal to address the repurchase obligation. CPAs address this going-concern risk as a qualification to their audit opinion if a firm cannot demonstrate the ability to operate for the following fiscal year. Referencing the challenges of the 2008 crash, if the seller is out of business, their repurchase warranty has little value.
Repurchase Process Challenges: One of the main concerns is the inefficiency of the repurchase process. Many repurchase demands could be resolved without requiring a full loan buyback. Streamlining this process would reduce costs and delays. Additionally, indemnity and other collateral offset mechanisms could be deployed to mitigate repurchase activity, provided the counterparty demonstrates capital sufficiency.
Conclusion: The rising trend in loan repurchase activity presents a significant challenge for IMBs and the housing industry generally. Balancing loan quality, affordability goals, and counterparty risk remains a complex task for Fannie and Freddie. Streamlining the repurchase process and finding a balanced approach with indemnity alternatives are essential to address this issue.
The coming 2023 year-end and CPA audit process may expose the extent of going-concern exposure the agencies face as some IMBs are not able to weather this down-cycle event. The pending reduction in capacity may help the remnant thrive as the market returns; it always does.
Definition: A going-concern qualification is a CPA opinion exposing that, in the CPA's opinion, the firm may not survive the next 12 months.
This article's content was loosely accumulated from the author's direct exposure to this issue as an industry advisor, his industry experience spanning over 40+ years, and the content from other industry publications, including the MBA and HousingWire.
About Dr. Schell:
Dr. Andy Schell, Ph.D., DBA, CPA, CMB
Dr. Schell is CEO, Managing Partner, and Co-Founder of Mortgage Banking Solutions and the Founder of MBS Financial Services ("MBS"), based in Austin, Texas. Dr. Schell is known for his ability to turn "vision into reality" and "chaos into order" as he finds creative solutions to the challenges his clients face addressing Revenue Stability, Technology Enhancement, Financial Management, and Workflow Efficiency.
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