The current explosion in EPDs and repurchase demands has the mortgage industry in crisis mode. Lenders all over the country are abandoning 100% financing programs, avoiding the subprime market, and holding their collective breaths that last year's originations are not going to come back to haunt them. Unfortunately EPDs and repurchase are rampant, as Wall Street has begun to take a hard line on origination problems and late paying borrowers.
A somewhat overlooked consequence of the rise in loan repurchases is the effect they have on a lender's balance statement. Regardless of the strength of a lender, very few in today's industry can afford to write large repurchase checks, or absorb indemnity deposits and make whole obligations. Worse yet, lenders selling loans to investors who double as their source of warehouse funds are finding themselves at risk of being cut off completely from the source of their lifeblood.
The most important thing to remember when faced with repurchases is to act quickly to develop a loss mitigation strategy. Lenders err when they respond to investor buyback demands with silence, intentional delays, and general indifference. Timing is critical in evaluating a proper defense of a buyback, and when no defense is available, a lender must quickly craft a loss mitigation plan that will successfully limit or even eliminate losses.
The initial step that must be taken involves a complete review of the investor agreement in conjunction with the reasons articulated for the buyback demand to verify that your rights and obligations are clearly understood, and that the investor is acting in good faith. Buyback demands for EPDs usually are permitted only with the first few months after transfer. Buybacks for origination issues, including fraud, have longer notice periods, however problems that come up years after a sale may violate the good faith and fair dealing covenants of a purchase agreement.
Once you understand your rights, and you verify the buyback demand is valid on its face, you then begin the investigative work to uncover the details that may mean the difference between a successful defense of a repurchase, and resigned negotiations to limit your losses.
Lenders must think outside of the box to obtain successful loss mitigation results. The origination loan officer should get involved, reaching out to the borrower. It is important to conduct a field visit to evaluate the current condition, market value and occupancy status of the property. Experienced professionals, ideally having underwriting skills, and legal knowledge, can scour the loan file for possible sources of contribution where professional negligence may have contributed to a default.
Clearly the one thing a ender cannot do is allow EPDs and resulting repurchases to distract them from making loans, or drain their reserves and warehouse lines of much needed capital. The best response is to source out the EPD response and loss mitigation work to qualified industry professionals, where unbiased, experienced people can conduct the proper review and field work needed to get the best result.
Our industry has had historical highs and lows. The period 2002 through 2005 were boom years, and we enjoyed the financial benefits that ensued. Now that the subprime market has collapsed and foreclosures are on the rise, those lenders who want to be around for the next boom need to have a serious plan to address EPD and repurchase issues to avoid a balance sheet disaster.