Mortgage buyers are finding new reasons to make the originators buy back home loans, ensuring that repurchases will remain a burden for lenders for the next few years.
Two of the most common justifications today are the discovery that the borrower has debts that were not disclosed to the buyer and problems with appraisals. Buyers are also putting tougher language into their contracts for loans being sold today.
"Repurchase requests are becoming more and more onerous," said Michael Pfeifer, a managing partner at the law firm Pfeifer & DeLaMora LLP, in Orange, Calif., which represents mortgage lenders and banks. "Investors are building more reps and warrants into their guidelines, and most of these contracts are in favor of the investor" buying the loan.
The upshot is that repurchase requests have not peaked and will remain at their elevated level for at least three years, according to lawyers who represent banks and mortgage servicers.
There is some good news on this front for loan sellers, however. Some have found a new grounds on which to fight repurchase requests, arguing that the blame for a default lies not with the company that underwrote the loan but with the one that serviced it (in cases where they are not one and the same).
On Friday, Bank of America Corp. confirmed the trend of rising buybacks, saying its repurchase expense rose $722 million in the second quarter, to $1.2 billion.
The two biggest active secondary-market investors, Fannie Mae and Freddie Mac, said repurchase requests are on the rise not because of guideline changes but because the foundering economy has led to higher defaults and loan reviews.
Both government-sponsored enterprises conduct due diligence and quality-control reviews when a loan is first purchased from a lender and again if it goes into default. Loans have to comport with the guidelines that were in effect at the time they were sold to the GSEs.
Last week the Federal Housing Finance Agency subpoenaed 64 Wall Street firms for information about mortgage-backed securities they sold to Fannie and Freddie. The subpoenas were widely viewed as a sign that the FHFA, the conservator for the two GSEs, plans to try to make the investment banks buy the securities back.
That could lead the Wall Street firms to turn around and make the originators eat the underlying loans.
"The subpoenas could trigger further due diligence and review of prospectus language and the reps and warranties contained in those contracts," said Justin Vedder, the managing director of PBIS Insurance Services Inc., which sells lenders coverage against repurchase losses. "It very well could cause more buybacks."
Undisclosed debt has become the single biggest reason for buyback requests, Vedder said. "It could be a new car that the borrower bought the day before closing or they forgot that they co-signed for something and all of that is liability to the lender."
Brian Coester, president of Coester Appraisal Group, a Rockville, Md., appraisal management company, said at least 15% of buybacks are related to appraisal problems. These range from outright fraud in comparable sales to the appraiser picking the highest possible value during the peak years of the market, he said.
Increasingly, Coester is seeing loans being pushed back to individual appraisers because the mortgage lender has gone out of business.
In rebuffing repurchase requests, lenders have been citing "silly mistakes by the servicer," Pfeifer said.
"If the servicer delayed a foreclosure and there was a 50% drop in real estate values, whose fault is the loss?" he asked.
John Kim, the head of business development at Morgan Stanley's Saxon Mortgage Services Inc., said servicers can affect only the severity of losses — so investors lose less money on a short sale, for example, than on the liquidation of a seized property.
"The servicing alone is not going to contribute to the reason the originator has to buy back the loan," Kim said. "It really doesn't mask the fact that there was a breach that caused the repurchase."