Today, the mortgage industry is in crisis. The collapse of the Sub- Prime Market and residential loan products with layered risks resulting in the onslaught of repurchase demands from investors has created the "perfect storm" in our industry. There seems to be no end to the negative publicity reported throughout the financial and mainstream media. Mortgage originators and investors who fed from the Sub Prime and layered risk troughs during the recent boom years are now facing the consequences of high volume coupled with exceedingly risky business plans.
Because of this new situation, Originators are finally taking the time to read their Purchase Agreements and what have they discovered? Investors can put back loans years after origination and sale, sometimes based on minor file issues alone. When our clients receive a repurchase demand letter and contact us, a commonly asked question is "I've received this request, what should I do?"
The answer however, is not always what the originator wants to hear. The most important factor in good loss mitigation in the face of a repurchase is timing. Unfortunately, many small and mid-size lenders simply ignore repurchase demands because either they do not have qualified staff to defend or resolve them, or because they hope that by ignoring them, they will somehow go away! A lender who has received notice of a repurchase due either to an Early Payment Default, First Payment Default, borrower misrepresentation, or any other reason must respond to the demand immediately. The response can be as simple as acknowledging receipt of the demand and requesting additional time to conduct an investigation. Asking for some time will allow the originator to determine if a loan deficiency exists, if it is curable and to develop a loss mitigation strategy to deal with the allegation. Repurchase demands not addressed immediately, could evolve into foreclosure, REO, or make-wholes, without any opportunity for an originator to protect their interests through appealing the request or participating in the loss mitigation. When a loan reaches the foreclosure stage there is little to be done except pay the amount demanded.
The good news is an originator can protect themselves by contesting a repurchase demand. Our experience has shown you may win some and you may lose some but basic and specific steps can be taken to mitigate losses quickly and effectively. Originators having a loss avoidance plan in place, internally or using a qualified outside vendor are better positioned for positive results in the appeal process. Successful appeals significantly reduce damages, diminish stress on cash flow, and free up originator's capital for growth rather than using it up for indemnities and make wholes. A Loss mitigation strategy demonstrates that an originator is prepared to handle the inevitable vicissitudes of the mortgage industry, and; it provides comfort to investors, warehouse banks, shareholders and employees. A Word of Warning though: the repurchase of loans is a complicated business process and realization of a loss mitigation strategy is very labor intensive, requiring specialized forensic skills. We do not recommend processors and underwriters prepare their own appeals because generally, they lack the objectivity needed in a forensic review. This begs the question, what should a lender do when they receive the repurchase demand?
We recommend once a repurchase demand is made the originator immediately conduct a forensic review of the entire loan origination file to determine the validity of the allegation, focusing on the payment history, misrepresentations of income, employment, assets, and occupancy. It is also prudent to review property values, particularly in instances where there is high cash out on a refinance, or when there was a large increase in a sales price occurring close to the subject transaction. Originators utilizing loan origination software with fraud detection features may have better luck weeding out some of these problems, but no software product is fool proof, nor can it eliminate ingenious manipulation of documents and data by borrowers, loan officers and others associated with the transaction.
If the initial forensic review establishes valid defenses to a repurchase demand, a well-crafted defense or appeal letter is warranted. Appeals are appropriate in these circumstances: where the loan is currently performing; where there are lender or servicer errors attributed to the default; when there is no evidence of misrepresentations; when there an intervening forbearance agreement is in place; when a subsequent sale to another investor has been completed; or where other factors that violate the good faith and fair dealing expectations of the parties in the contractual arrangement. This letter should be drafted by someone with extensive mortgage industry and legal experience to maximize the likelihood of success. Words can be tricky; you must know what to say and what not to say and when to say it.
If the forensics reveal loan deficiencies, which are not easily curable, field inspections are critical. On site visits are key. They verify occupancy, uncover tenancies, and determine the present condition of a property to assist in efforts to secure, repair and market it for sale. We encourage our clients to control properties pre-foreclosure with powers of attorney and not Deeds in Lieu of Foreclosure. This avoids an originator entering the chain of title and assuming daily obligations and liabilities relating to the property.
The primary objective of loss mitigation is to reduce liability and losses associated with repurchases. We counsel our clients to view the transaction as the compilation of data from various mortgage and real estate professional sources as well as vendors involved in the loan origination as they usually have E & O insurance to cover negligent acts and omissions. We also look at the appraiser and the settlement agent through closing protection letter coverage or a professional liability policy for sources of loss recovery.
Originators must not be afraid to have direct communication with the borrowers themselves, to advise them of loan origination issues and to guide them into making the right choices to cure the problems. Loan officers can play a major role in assisting in the loss mitigation process. The loan officer knows, or should know the borrower best and is well suited for initial contact, as the borrower may feel more comfortable speaking with the person who took their loan application to begin with.
There are no foolproof methods to preventing repurchase demands. Not all the quality control, fraud software, and loan officer training in the world can catch every origination problem but there are things, which can be done to prevent these demands. You must not ignore repurchase demands; failure to address them is a perilous business miscalculation and a critical threat to the survival of your company.
The good news is that there are methods of challenging repurchase demands, and when that fails, to engage in coordinated, well-planned loss mitigation to reduce exposure and preserve capital for growth. Recognizing the issues and assigning the problem to qualified professionals is the most appropriate response we can recommend.
Andrew L. Liput has been an attorney for 20 years, most recently as Senior Vice President and General Counsel to US Mortgage Corp. He is an owner of Repurchase Resolution Specialists in New Jersey. http://www.repurchasespecialists.com/
Roberta R.Janel is a Certified Mortgage Banker, and is Managing Director of JH Cohn's Professional Mortgage Consulting group, also based in New Jersey, which also provides repurchase assistance to lenders. http://www.jhcohn.com/