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Turning The GSEs’ Repurchase Policies Into Opportunity

Lenders selling to Fannie and Freddie have to take swift action and enact robust strategies to mitigate risk

Jenevieve Impavido
Repurchase Policies

Time is money, the saying goes. But for mortgage lenders, the pressures of a ticking clock are felt in multiple ways, whether it has to do with rate lock expirations, meeting RESPA-TILA disclosure timelines, appraisal deadlines, or investor purchase deadlines.

Now lenders have a new beat-the-clock challenge — responding to increasing repurchase requests from Fannie Mae and Freddie Mac. And if they fail to resolve them, they could potentially lose $100,000 or more of the value of each repurchased loan, according to some estimates.

These new demands couldn’t come at a worse time for lenders, who are struggling to maximize opportunities in a high-rate environment with less staff. But there is a path forward that virtually eliminates a lender’s loan quality issues, increases the salability of their files, and creates a significant competitive advantage.

A Major Wake-Up Call

Fannie Mae and Freddie Mac are increasing scrutiny on the loans sold to them, triggering a wave of concern among seller/servicers. While repurchase requests have increased, even on performing loans, the full consequences might not yet be fully realized.

The new policies were prompted primarily from an increase in loan file errors among the large volume of loans made during the pandemic, when rates were at all-time lows and lenders were dealing with capacity issues. The problem is that the GSEs have three years after purchasing a loan to request a repurchase, so the requests are still coming — and many independent mortgage banks that do not retain servicing will not be able to keep repurchased loans.

In response, the Mortgage Bankers Association and other trade groups have asked the GSEs to soften their approach by offering other remedies for loan defects on performing loans short of a repurchase demand. However, it’s highly unlikely that the GSEs will loosen their policies, especially since they are symptomatic of a broader industry-wide move towards stronger loan quality. Indeed, higher mortgage rates have substantially increased losses for some lenders that sell loans into the non-agency secondary market.

Lenders that sell to Fannie and Freddie now have to take swift action and enact robust strategies to mitigate repurchase risk. They’ll need to make sure their loans are squeaky clean during the production process, which takes more time and effort when people-powered, which means more costs. And they’ll have to find a way to do it with fewer resources than they had last year, as many have laid off staff in order to survive amid lower origination volumes.

With the risk of repurchase looming ominously over them like the Sword of Damocles, lenders face an urgent need to elevate their quality control measures. By taking action now, however, lenders can turn these challenges into an opportunity to fortify their operations against future risks — and increase their chances of long-term success.


An Industry Reacts

Lenders have been feeling the heat from the GSEs’ ever-changing polices since the housing market bubble burst in 2008, and their responses so far have been a mix of strategic adjustments and rapid learning. This hasn’t been easy, particularly during the most recent downturn. Not only does the average lender have fewer people dealing with more responsibilities, but while right-sizing, they also may have lost a considerable amount of institutional knowledge and experience, which can create operational gaps that put them at increased risk.

Clients that I’ve been advising are already revising their strategies, typically by doubling down on new technologies and services that both ensure the smooth running of their loan production processes while enhancing loan quality. Yet it’s clear that many lenders have not yet fully harnessed the potential of these tools. Automation and AI are still significantly underutilized in our industry, particularly when it comes to certain areas of loan production such as borrower employment and income verifications. This makes data cross-referencing for compliance with the GSEs’ new guidelines a formidable task, and auditing in prefunding QC a must.

Moreover, most third-party loan QC providers have also been stretched thin, because they too have had to right-size their operations with the market. For example, it is prudent to ensure your vendor is ready to comply with the new Fannie Mae QC requirements, which became effective Sept. 1. This is yet another major roadblock for lenders trying to meet the new 90-day turnaround requirement for performing post-close audits, curing defects, and devising plans to prevent future issues — not to mention meeting the minimum requirement for prefunding reviews.

Yet an increased attention to loan quality isn’t important only to those selling loans to Fannie Mae and Freddie Mac. All investors are amplifying their focus on this area. If you don’t sell loans to Fannie Mae, it is still a good idea to get insights into loan quality sooner to address systemic issues and keep your closed loans sold, regardless of investor. Because loan quality has increasingly become an industry-wide concern, lenders that find themselves lacking the resources and support to ensure compliance need to get busy finding them.

Demands at worse times

Getting Help

Assuming the average lender isn’t in the financial position to recruit and hire more compliance staff, the best strategic move is to identify and collaborate with partners that possess the expertise, resources, and cutting-edge technologies a lender needs to ensure Fannie and Freddie compliance. The right ally is one that can facilitate comprehensive post-close, pre-close and loan component reviews while tailoring their focus to GSE-specific guidelines.

Lenders can start by being proactive about understanding whether and how their existing QC partners plan to help them meet Fannie Mae’s expedited 90-day window and evaluating the available technologies and tools their vendor has at their disposal. For example, does the vendor have a way of evaluating high risk loan characteristics prior to closing? Can they validate loan file data before conducting post-close audits? And with more investors concerned over loan quality, how customizable is their technology when it comes to detecting defects for all loan products?

This analysis should include a vendor’s staff resources, too. A worthy partner should have already adapted their workforce structure to ensure their clients can not only meet but exceed the GSEs’ requirements and deadlines for both pre-close and post-close audits.

Automated technologies that have been machine-trained on large libraries of loan documents, preferably billions of them, can help to validate the quality of loan file data prior to audit review. The true magic unfolds when applying business rules to accurately identify conditions and ensure defects aren’t missed. And in cases where these technologies hit a roadblock or need auditor review, a lender’s partner should also be able to deploy human experts to assist in the process.

Many lenders I work with have already experienced the benefits of this synergy. Leveraging AI-enabled document processing, data extraction, automated auditing, and reporting coupled with human expertise results in an enhanced level of quality and a reduction in loan file touches. Whether performing QC in-house or outsourcing, I’ve seen lenders be able to reduce their costs by a whopping 35% to 50%.

That being said, it’s critical to choose a partner that is not only capable of supporting a lender’s loan quality processes but is also consistently scrutinizing its own operations and making iterative process improvements, so the gains in ROI improve over time. The best partner, for example, should be able to support dynamic, real-time reporting that facilitates the lender’s ability to monitor defect rates and create an effective action plan for improving the quality of their loan files.

Where Opportunity Lies

While the labyrinth of mortgage compliance grows more complex, the tools and resources available to help lenders navigate it have never been more accessible. And by leveraging the right partnerships, an opportunity emerges for forward-thinking lenders to create a defect-free loan production process and gain a real competitive advantage in the future.

AI and business outcome automation technology not only help lenders “beat the clock” when it comes to dealing with timely QC practices that can lessen repurchase risks. They also help free up staff to focus on more complex, strategic tasks that improve productivity and profitability. From a broader perspective, they do even more by helping lenders scale operations more wisely based on market conditions. When the market is up, they can focus on growth without over hiring. When the market declines, they can operate leanly without compromising quality and compliance—while also minimizing layoffs and the associated knowledge gaps that often ensue.

Indeed, the capacity to navigate market downturns and capitalize on upturns is key to long-term success in the lending business. By adopting AI and business outcome automation technologies, and with the support of the right partners, lenders can create a more flexible, resilient business that can thrive regardless of market cycles.

But every lender needs to remember the sands of time continue to fall. While it may feel a little late to identify new strategies for dealing with the GSEs’ loan quality and repurchase policies, lenders would be wise to heed the words of Chinese philosopher Lao Tzu: “The best time to plant a tree was 20 years ago. The second-best time is now.”

This article was originally published in the Mortgage Women Magazine September 2023 issue.
Jenevieve Impavido,
Vice President of Audit Services

Jenevieve Impavido is vice president of audit services, LoanLogics

Published on
Sep 18, 2023
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