In the "buyback wars" with secondary market investors, home lenders may need to choose their battles.
In recent weeks buybacks caused a Wisconsin nonbank that had been around for 20 years to close, and derailed the sale of a mortgage banking and brokerage firm that lends in several states. The issue is now so white hot that the Mortgage Bankers Association is planning a series of seminars around the nation about lenders' rights as seller/servicers.
"Our seminars focus on different things," said the trade group's 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 mortgage banker 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 said, however, that at some point seller/servicers must 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."
Four of the nation's five largest home loan originators — Wells Fargo & Co., Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. — are in the odd position of being on both the receiving end of repurchase requests and getting their correspondents to acquire delinquent loans.
Each has a special department 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 were down considerably from the fourth quarter but considering the staggering amount of delinquent loans still held by the government-sponsored enterprises, it is clear that the game of hot potato is not over.
For example, Freddie Mac purchased $56.5 billion of loans that were 120 days or more delinquent out of its securitized pools in the first quarter alone.
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 in a sense "on top") and the rest of the industry at the foot of the hill, trying desperately to fight off claims on "representations and warranties" and preserve cash.
One due diligence underwriter said 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," the underwriter said.
At least two due diligence firms represent both investors and originators but did not 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 founder and chief executive of Allonhill Financial Services in Denver, said her due diligence firm does not perform both tasks, concentrating mostly on analytics for buyers of whole loans or mortgage-backed securities.
But, Allon said, "I've heard stories of firms doing what you're talking about."
In some cases such conflicts of interest might be "unintended," she said.
Before 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 are asking seller/servicers to repurchase loans that are two and three years old, some even older.
At first, the requests were not 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 (before the crisis) was informal.