When it comes to the "buyback wars" between originators and secondary market investors, the best defense is a good offense. And that entails hiring outside due diligence firms, attorneys, and an army of in-house underwriters whose mission is to refute repurchase claims and fight off allegations that a loan was fraudulent and therefore should be bought back.
But the whole issue of buybacks is becoming increasingly complicated. For instance, four of the nation's five largest originators — Wells Fargo, Bank of America, Chase and CitiMortgage — find themselves in the odd position of being on both the receiving end of repurchase requests and getting their correspondents to acquire delinquent loans.
Each has special departments whose mission is to fight claims. None, as might be expected, want to talk about it and for good reason: according to the latest figures, the "Big Four," combined, were forced to repurchase $8.7 billion of residential loans during the first quarter.
The good news for the megabanks is that first-quarter buybacks are down considerably from the fourth quarter but when they look at the staggering amount of delinquent loans still held by the GSEs, the crisis isn't over. In a Securities and Exchange Commission (SEC) filing, Freddie Mac said it owns $55 billion of delinquent unsecuritized whole loans.
In other words, the mud slides downhill in mortgage banking with the GSEs and Wall Street on top, the megabanks in the middle (but also "on top") and the rest of the industry at the foot of the hill, trying desperately to fight off claims on "reps and warranties" and preserve cash.
In recent weeks buybacks caused a Wisconsin nonbank that had been around for 20 years to close its doors, and derailed the sale of a mortgage banking/brokerage firm that lends in several states.
The buyback issue is now so white hot that the Mortgage Bankers Association (MBA) is planning a series of seminars around the nation to educate lenders about their rights as seller/servicers.
"Our seminars focus on different things," said MBA chief economist Jay Brinkmann. "One key thing we talk about is what type of buybacks are worth fighting for and which ones aren't. There's some lenders out there that have three different repurchase requests on the same loan-all for different reasons."
One due diligence underwriter I interviewed told me it's not unusual for outside vendors to work both sides of the aisle: "Some of these firms were doing the original underwriting work four years ago and now they're representing the investor on the same loan."
At least two due diligence firms I came across represent both investors and originators but didn't want to be identified. "It may seem like a conflict of interest if we're representing both investors and lenders but it's not-unless it's on the same pools of loans, but we're not doing that," said one manager.
Sue Allon, the head of Allonhill Financial Services of Denver, said her due diligence firm does not perform both tasks, concentrating mostly on analytics for buyers of whole loans or MBS. But she says, "I've heard stories of firms doing what you're talking about." Allon said in some cases such conflicts of interest might be "unintended."
Prior to the mortgage meltdown-which began in earnest three years ago in the subprime sector-most buyback requests entailed an originator repurchasing a loan if it went into default within 90 days of being sold. Today, Fannie Mae and Freddie Mac are asking seller/servicers to repurchase loans that are two and three years old, some even older.
At first, the requests weren't all that large but as time went on and delinquencies worsened the volumes became staggering. Some larger lenders have always had employees dedicated to fighting buybacks, but most of the effort (prior to the crisis) was informal.
Law firms are now getting into the buyback game as well. The key question for seller/servicers is how often can they win their buyback battles. One mortgage banker close to the buyback situation said he knows of a lender that recently won 52 out of 55 repurchase disputes. He had to resubmit documents and it took a lot of time but he won," said the official, requesting his name not be used.
He noted, however, that at some point seller/servicers have to cut their losses. "Rep and warranties can be fought to a degree," he said. "But fraud lives forever. If it's discovered that fraud was involved there's nothing the originator can do."
In a separate article on buybacks, National Mortgage News online version reported that the loan buyback plague continued on unabated in the first quarter with three seller/servicers, accounting for about three-fourths of the industry's repurchases, according to an analysis done by National Mortgage News.
BofA repurchased more loans than any other originator with $4.4 billion, followed by Chase ($2.4 billion) and Citigroup ($1.4 billion).
Although the figures are large, BofA and Citigroup actually had significant declines in buybacks compared to the fourth quarter.
BofA's repurchases fell by 56%, Citi's by 70%. Chase's declined by 11%. All three have special teams that work on fighting buybacks.
One source close to Chase said much of the lender's current buyback requests come from "legacy" loans that were originated by Washington Mutual, which JPMorgan Chase bought in the fall of 2008.
"It's a disaster," said the source, requesting his name not be used. "A lot of it is payment-option ARMs."
A Chase spokesman declined to comment on specifics, but acknowledged, "We have a lot of people working on it (buybacks)."
In a recent SEC filing JPMorgan disclosed: "In 4Q09 approximately 14%, 58% and 20% of repurchase demands, respectively, came from 2006, 2007 and 2008 vintages."