Unpacking the drivers and costs of GSE repurchase demands

Income and appraisal-related issues are two of the three leading reasons why lenders are forced to repurchase loans from Fannie Mae and Freddie Mac, at an average of $32,288, a study from Reggora and Stratmor found.

Those two causes are responsible for 57% of the buybacks over an 18-month period from April 2023 through this October. The average loan repurchase rate during the period was 49 basis points.

Fannie Mae and Freddie Mac don't publish aggregate, granular statistics regarding repurchases and Reggora wanted to give its clients, as well as lenders at large the ability to benchmark themselves, said Brian Zitin, its CEO.

The study sought to explore if lenders were performing better or worse, and to asses how much the repurchases were costing them. "And how big of a deal is it really?" Zitin continued.

This report results are similar to critical defect data from quality control reviews conducted by Aces Quality Management. Those reviews include not just conforming loans, but other forms of conventional and government mortgages; the latter group typically has higher defect rates.

For mortgages sold during the second quarter, Aces' measured the defect rate at 1.81%, up from 1.58% in the first quarter and 1.53% for the fourth quarter last year, but well below the 2.47% peak in the second quarter of 2022.

Zitin noted that study buyback rate is higher than the historical norm and that is likely from the government-sponsored enterprises finally catching up in its reviews of the loans generated during the pandemic.

Doing some rough math, if five of every 1,000 loans sold to the GSEs has to be repurchased by the seller, at a median cost of nearly $40,000 for each instance, the loss is nearly $200,000, Zitin pointed out.

That is a significant chunk of money in an industry where total production revenue, including fee income, net secondary marketing income and warehouse spread, was $11,417 per loan in the third quarter, according to the Mortgage Bankers Association. The net profit was just $701 per loan for the period.

Independent mortgage bankers had a disproportionate share of repurchases, 26% more than depositories.

Several reasons are possible for this, including because they are subject to more regulatory scrutiny, banks might have tighter controls in place, Zitin pondered. Another possible reason is that banks are less likely to rely on the secondary market because they can portfolio mortgages.

The study found the most common income-related issues for a repurchase are the misrepresentation or miscalculation of borrower income; the failure for the loan to meet the debt-income ratio requirements because of calculation errors; and income documentation errors or omissions.

Reggora's expertise is on the appraisal side of the transaction, so he was unable to comment on the income findings. However, when it came to appraisal issues resulting in repurchases, many lenders are still manually reviewing those valuation reports "and not using the newest and best technology to streamline that," Zitin said.

The study looked at costs such as what a lender is paying the average underwriter. "An interesting result of the study was that the higher paid underwriters actually had a slightly higher repurchase rate," Zitin said. "I think that there's just a lot of technology adoption that can be done to increase efficiency while still improving accuracy."

During the Biden administration, appraisals were heavily scrutinized, especially with the establishment of PAVE, formally known as the Interagency Task Force on Property Appraisal and Valuation Equity.

"This study demonstrates that [appraisal is] still a particular sticking point when it comes to being one of the top issues to cause repurchases," Zitin said.

Prior studies have found the issues involving appraisals are around comps, as well as the accuracy and completeness of the report.

In the Aces second quarter study, appraisal errors nearly doubled from the first quarter and represented a 7.41% share of manufacturing defect findings.

"Appraisal costs, whether directly related to repurchases or to the review process, continue to be one of the few unexamined and unexploited areas of cost savings for lenders," said Mike Seminari, Stratmor director of customer experience in a press release. "This study brings to light an opportunity for lenders to seek ways to limit repurchase losses and seek alternate, cost-saving review methods."