While public debate continues on
First, a basic primer: when lenders originate and sell loans to Fannie and Freddie — either directly or through third party aggregators — they are on the hook financially for
This is fair. So, when a borrower defaults on a GSE loan because of material problems with the underwriting of that loan, it is not unreasonable to ask the lender to buy back (re-purchase) that loan.
Unfortunately, what we have experienced over the last year is an increase in repurchase demands on loans that are performing — loans where the borrower is not even in default.
What has also changed for lenders is a significant increase in their back-end loss on a repurchase. Because mortgage rates have doubled in the last year, the cost to lenders of taking a loan out of an MBS pool has skyrocketed. As a result, the back-end loss to the lender on each repurchase is around 30% per loan. This is over $100,000 on an average loan and over $300,00 for high-cost loans.
Moreover, this is a highly inefficient resolution. A repurchase reduces expected GSE losses by a small fraction of the cost it imposes on the lender, because of the cost of taking loans out of MBS pools. This is exacerbated by the fact that there is no third-party appeals process to contest a GSE repurchase demand. And it is an especially unfair outcome, for lenders, since these are performing loans!
A better option exists for these performing loans with underwriting defects - an indemnification. This is the approach FHA takes. Moreover, an indemnification fully protects Fannie and Freddie, since the lender continues to be responsible for repurchasing the loan if it later becomes non-performing.
So, CHLA recently sent a
This is not just a matter of fairness for lenders, it is also a better outcome for consumers.
Fannie Mae and Freddie Mac loans have strong consumer protections in the form of required loss mitigation actions and a prescribed waterfall in the event of a borrower default. However, when a lender is required to repurchase an Enterprise loan, it is no longer an Enterprise loan. Those loss mitigation requirements and consumer protections simply expire when the repurchase takes place, through no fault of the borrower! Without a secondary market, a lenders' only option is usually to sell a loan on the scratch and dent market, to purchasers who commonly minimize losses through foreclosure if the borrower defaults.
The practice of using repurchase demands as the default option for performing GSE loans with defects also hurts consumers by discouraging new GSE loans to underserved borrowers and to borrowers in rural areas. Underserved borrowers have more risk and generally thicker loan files, which create more repurchase risk. The same is true with rural borrowers, since appraisal comps are less prevalent in rural areas, leading to more repurchase demands based on alleged appraisal problems.
Again, CHLA agrees that it is appropriate for lenders to be held accountable for underwriting defects. However, when it comes to repurchase demands, the penalty is now wildly disproportionate to the crime. Particularly since CHLA members report that many repurchase demands are based on minor, technical defects largely unrelated to any real risk of loan loss.
To support this contention, in our letter CHLA offered four real-world repurchase demands, supplied by our members. In one case, a Home Possible Loan to an underserved borrower was based on a minor disagreement about income, where overall DTI in practice was at least as good as the underwritten DTI. Another loan highlighted the unfairness of relatively small disagreements over appraisal values creating large repurchase exposure to the lender. And one loan the GSE couldn't even allege a specific violation!
Added to these concerns is the fact that smaller lenders that execute GSE loans through aggregators are at even greater risk, because they don't have the legal right to challenge a repurchase request directly with Fannie or Freddie; they have to work through the aggregator. Our smaller lenders report that in some instances the aggregator does not forward the repurchase demand from the GSE to the lender until close to the deadline to challenge it. And their challenges to repurchase demands are not always fully presented or vigorously pursued by the aggregator to the GSE.
So, in late March, CHLA wrote Fannie Mae and Freddie Mac, asking both to impose "rules of the road" for aggregator behavior, Our request is simple and fair: aggregators should be required to pass along repurchase requests to the lender promptly upon receiving them from the GSEs — and required to promptly summit a full challenge prepared by the lender to the GSE.
Technical issues like repurchase and indemnification policies may not get a lot of attention — but they can be consequential. A balanced approach is the best outcome for borrowers, lenders, and the GSEs alike.
