Buyback volumes remain below their 2022 peak but are still elevated compared to pre-pandemic levels, adding to financial challenges for credit unions, banks, and independent mortgage bankers. These lenders are already facing average pre-tax losses of $534 per loan origination due to high operating costs and low origination volumes. To operate more efficiently, lenders have reduced their sales and non-sales staff by 44% since 2022, according to the Mortgage Bankers Association.
To mitigate the risk of costly human errors and the financial repercussions of mistakes, lenders need strategies to avoid mortgage loan buybacks. Technologies, precise quality control, and collaboration are essential to prevent serious financial and reputational fallout.
The cost of a bad hand
When selling a loan, lenders provide representations and warranties to guarantee the accuracy and completeness of the loan data to government-sponsored enterprises (GSEs). Failure to maintain high data accuracy standards can lead to loan buybacks. These buybacks occur when a sold loan fails to meet underwriting, legal, or regulatory standards, resulting in financial losses, legal fees, and reputational damage for lenders.
Loan buybacks also affect investors and borrowers, introducing volatility and diminishing returns while tightening credit access for minority and first-time homebuyers.
Don’t fold just yet
Lenders, tech providers, investors, and GSEs are working together to find solutions to mitigate risk. Technologies aim to increase data accuracy, while Fannie Mae and Freddie Mac are exploring alternatives to the traditional buyback process to reduce costs for lenders and provide additional time to address errors.
Despite these efforts, buyback costs remain a pressing issue for lenders, as loan defects, documentation issues, fraud, and underwriting errors continue to drive repurchase demands.
What’s in the cards?
While repurchase volumes have trended downward in recent years, a resurgence may be on the horizon. Critical defect rates across mortgage loans saw a modest increase in Q1 of 2024, ending five consecutive quarters of decline. In Q2, Freddie Mac seller repurchases rose, while Fannie Mae repurchases declined, drawing industry attention to the discrepancy.
Stack your deck
Lenders can minimize repurchase risk by taking proactive risk management strategies. Starting with quality control, leveraging automation, and staying ahead of potential issues are critical steps for lenders to reduce buyback risk and ensure loan quality.
When reviewing the list of approved vendors for Fannie Mae and service providers for Freddie Mac, it is important to note that while GSE approval is a good starting point, the accuracy of data from these vendors can vary significantly. This accuracy directly impacts the frequency at which relief is granted for reps and warrants. Instead of solely relying on GSE approval status, lenders should consider how consistently a particular technology helps mitigate repurchase risk.
Maintaining open communication with investors is crucial in managing repurchase risk. Transparency and collaboration can help lenders understand investor expectations and prevent future buyback triggers. Partnering with third-party quality control providers can also strengthen investor relationships by providing objective oversight and ensuring loan quality throughout the entire process.
Despite a decrease in overall buybacks, the recent increase in critical defects highlights the importance of not becoming complacent. Mitigating repurchase risk requires a focused approach that includes proactive quality control, utilizing the latest technological tools, and fostering strong investor relationships. While GSE buyback alternatives may provide relief from traditional repurchases, maintaining high loan quality standards is essential for long-term success in the fast-paced mortgage market.
By John Hardesty, EVP of Mortgage at Argyle.
This article does not necessarily reflect the views of HousingWire’s editorial department and its owners. For inquiries, please contact the editor at [email protected].