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Mortgage market complexity foils consumers and undermines fair lending

National Mortgage Professional
Jul 30, 2007

Repurchase demands: The damaging impact on your net worthRoberta R. Janel, CMB and Andrew Liput Esq.Mortgage repurchases Imagine that you are the owner of a mortgage brokerage or banking firm. Over the last few years, due to the remarkable real estate market, your business savvy and hard work, you have built up your business's net worth. Everything is going well, and then—pow! The equity that you had yesterday is gone. Your net worth does not even meet the minimum state licensing requirements. Is this a bad dream? No, it is a reality for some originators. The current explosion of investor repurchase demands due to early payment defaults (EPDs), borrower misrepresentations and other loan deficiencies has put the mortgage industry in a crisis mode. Declining origination volumes resulting in decreased cash flow are wreaking havoc in our industry. Originators all over the country are abandoning 100 percent financing programs, avoiding the sub-prime market and holding their collective breath that last year's originations are not going to come back to haunt them. Today, repurchase demands are raging as investors become more aggressive while they take a hard line on origination problems and late-paying borrowers. Mortgage loan repurchases can have an enormous impact on an originator's balance sheet. Regardless of the financial strength of an originator, very few in today's industry can afford to write large repurchase checks or absorb indemnity deposits and make whole obligations. Worse yet, originators 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. A mortgage repurchase request is recorded as a liability on the company's balance sheet. However, this does not occur until the obligation is probable and estimable, which is an extremely compelling incentive to address any repurchase request immediately. Once a liability is determined, it's shown as the dollar amount of the estimated loss, which could be anything from the total amount of the demand or, as the result of successful loss mitigation, just the yield spread premium. Whatever the amount, it corresponds to a decrease in owner equity and remains on the balance sheet until resolution. Even if you buy the loan back at the purchase price set by the investor, your financial statements may need to reflect an immediate impairment, which is the difference between what you paid and what the loan is currently worth in the market. The financial strength and perhaps the survival of your company depend on getting the best advice from a trusted advisor with wide-ranging experience in the mortgage industry. The most important thing to remember when faced with a repurchase demand is to act quickly. You must develop a loss mitigation strategy. Originators commit a fatal error when they respond to investor repurchase 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 immediately design a loss mitigation plan that will successfully limit or even eliminate losses. The initial step after a repurchase demand is received is to do a complete review of the investor agreement (purchase and sale agreement, seller agreement or mortgage loan purchase 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. Repurchase demands for EPDs usually are permitted only within the first few months after transfer. Buybacks for origination issues, including fraud, have longer notice periods. Problems that come up years after a sale may violate the good faith and fair dealing covenants of an investor agreement. Once you understand your rights and verify the buyback demand is valid on its face, you then begin the forensics to uncover details that may mean the difference between a successful defense of a repurchase and resigned negotiations to limit your losses. Originators should take a multi-faceted approach for successful loss mitigation results. The origination loan officer should get involved, reaching out to the borrower. It is also important to conduct a field visit to evaluate the current condition, market value and occupancy status of the property. Professional negligence may have contributed to a default, and so it is essential to scour the loan file to determine if negligence contributed to the deficiency. Originators cannot allow repurchases to distract them from making loans or drain their reserves and warehouse lines of much-needed capital. The best response when originators receive a repurchase request is to source out the forensics, response and loss mitigation work to qualified, unbiased and experienced industry professionals who can conduct the proper review and field work needed to get the best result. Our industry has had historical highs and lows. 2002-2005 were boom years, and we enjoyed the financial benefits that ensued. Now that the sub-prime 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 in order to survive. Roberta R. Janel, CMB is managing director of J.H. Cohn Professional Mortgage Consultants LLC, a division of New Jersey-based J.H. Cohn LLP, which provides advisory, consulting and repurchase assistance to lenders. She may be reached at (973) 871-4027 or e-mail [email protected]. Andrew L. Liput Esq. has been a banking industry attorney for 20 years, most recently as senior vice president and general counsel to U.S. Mortgage Corporation. He is an owner of Repurchase Resolution Specialists in New Jersey. He may be reached via his Web site,
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