Could this insurance help lenders manage buybacks?

October 6, 2023 9:30 AM

Loan repurchases have been particularly expensive this year for lenders that resolve them by reselling the mortgages in the scratch-and-dent market. So some companies have turned to an alternative.

Lenders like Beeline and Plaza Home Mortgage have bought repurchase insurance for certain types of loan defects that may prompt government-sponsored enterprises Fannie Mae and Freddie Mac to request buybacks.

What mortgage companies and some providers are finding is high costs associated with fraud and defect risk may make the coverage compelling but thin margins for originators argues for buying it selectively in some cases.

To help companies navigate these considerations, we asked several experts about some of the various options available recently and their limits.

Why lenders signed up for it

Beeline Mortgage learned about the insurance roughly a year ago from a board member and has purchased some coverage in the past year that one executive said has provided some peace of mind.

"It was something that was keeping me up at night: How can we protect ourselves against repurchase risk?" Jessica Kennedy, Beeline's chief operating officer, said in an interview.

Beeline opted for retroactive coverage, which some providers offer within certain limits and with deductibles. Other providers may only offer go-forward insurance for particular risks. Beeline pays a certain number of basis points per loan for the coverage.

Plaza Home Mortgage is another company that's used repurchase insurance and found it best suited for its correspondent channel, through which it buys closed loans from other lenders.

"In correspondent, you work with very thin margins, so you don't want to risk anything," said Salpi Meyer, an executive vice president in sales in that channel at Plaza. "We all learned our lesson from the financial crisis when people couldn't buy back loans.

"Our clients have a lot of net worth, but we didn't want to take a chance," Meyer said. "What if all of a sudden one of our partners couldn't buy back a loan. What if we had to eat the cost? This insurance helps us be more sustainable."

The range of options

As Plaza's application of the insurance to the correspondent channel in particular suggests, in a generally tight mortgage market, lenders are thinking strategically about where and what type of policies works best.

Plaza previously had fraud coverage for some of its loans and found it appropriate if narrower in scope. It decided broader repurchase coverage made more sense for correspondent in particular due to the channel's thinner margins and counterparty risk.

Multiple types of insurance from different providers exist but the market is a little bit of a microcosm in terms of the industry-facing contacts, and underwriters associated with Lloyd's of London backing it.

Prieston & Associates and SitusAMC's Securant Risk and Insurance Services division are two providers of repurchase coverage. Beeline has worked with the former and Plaza has worked with the latter.

The enterprises traditionally require errors and omissions policies to cover defect risk but Arthur Prieston, president of P&A, said repurchase insurance does more to address the representation and warranty breaches that trigger buybacks.

"The GSEs should seriously take a look at rep and warranty insurance instead of requiring errors and omissions," he said.

Lenders should be ready to undergo some upfront scrutiny if they want more extensive coverage in this area, said Justin Vedder, a managing director at SitusAMC and president of Securent.

"We actually do the reviews up front, before we insure the loans," he said. "We do a double look with belt-and-suspenders to make sure we cover everything."

A potential middle ground

For companies that want to selectively obtain coverage and are primarily concerned about misrepresentation, some providers offer fraud insurance for those worried the current high-rate market may lead to more problems.

Altisource is one company that helps lenders obtain that type of coverage on a retrospective basis, said Justin Demola, senior vice president, origination solutions, at the company, and president of Lenders One.

"I don't really want to get into the premiums on it, but it all depends on how many loans are being insured on a monthly basis. Obviously, the greater the number of offers, the lower the premium," he said.

The application of fraud-only insurance to a third-party loan channel like correspondent might be a good middle ground for lenders looking to invest in a moderate amount of coverage and are confident that could cover their biggest risk exposures.

"You're often not relying upon your own underwriters, have much of a connection with the borrowers or loan officer or know what's happening during origination. In those cases, this could make you a stronger counterparty," said Demola.