Mortgage originators are facing a new wave of forced loan repurchases as the government-sponsored enterprises step up reviews for underwriting problems.
The current wave differs in several respects from the one that drove numerous mortgage companies out of business in late 2006 and 2007. Back then, the requests came largely from private investors like Wall Street firms, and they were triggered mainly by defaults that occured within a few months of the loan closing.
The new loan putbacks are coming from Fannie Mae and Freddie Mac, which generally have more power to return loans than private investors. And though mounting delinquencies are driving the GSEs' reviews, the loans being sent back are often several years old, and not all of them are delinquent. Some lenders have claimed that the GSEs have gone too far, pushing back loans for minor oversights that are not relevant to credit performance.
Some also said that more vigorous putbacks have led to more careful underwriting and have spurred counterparties further down the mortgage food chain to toughen standards on one another.
"If you're a mortgage banker, and you sell a loan to a GSE-sponsored company … the number one thing you have to be worried about is that at some point, that loan is going to have to be repurchased due to a fraud claim by the GSE," said Scott Stern, the chief executive of Lenders One, a cooperative of mortgage banks based in St. Louis.
Rob Chrisman, the director of capital markets at Residential Pacific Mortgage, a Walnut Creek, Calif., lender, said the increase in repurchase requests from the GSEs became discernible about two months ago. But small and midsize lenders may not have felt the full impact yet, he said, since such demands take time to filter through the aggregators that deliver most loans to the GSEs.
The aggregators sometimes put up a first line of resistance against buying back loans, Mr. Chrisman said. "The whole process … takes like a month or two," because the aggregator "doesn't want to buy back the loan any more than the small lender does," he said.
Repurchase demands have included performing loans with minor lapses in documentation, he said. Originators sometimes can recover missing documents and resolve the problem, but meeting a repurchase demand on even a single loan can strain small originators.
The increase in repurchase demands has been "overkill," Mr. Chrisman said. "I think there's general agreement that the pendulum has swung too far."
In an e-mail, a spokeswoman for Fannie Mae said the increase in repurchase requests is the result of "the increase in defaults, not any change in policy. We are committed to working with our servicers and try to be balanced in our reviews. In addition, we have a process in place for servicers who have questions or want to provide additional information."
In its third-quarter financial filing with the Securities and Exchange Commission on Monday, Fannie said repurchase requests that had not been fulfilled by servicers had increased in recent months, because of the significant increase in demands it had made, and because of financial and liquidity strains on servicers.
In August, Fannie announced several steps to "expand loan reviews where the company incurred a loss or could incur a loss due to fraud or improper lending practices." The GSE said it planned to more than quadruple its reviews of foreclosed mortgages from January, to 4,000 a month by yearend, and to double its antifraud investigations. Fannie also said it was expanding "quality-control reviews for targeted products and practices."
Freddie said it could not make executives available to discuss the issue. In August, the GSE disclosed that in the first half its putbacks rose 130% compared with the first half of 2007, to $737 million. That increase roughly paralleled a 51-basis-point increase in Freddie's delinquency rate, to 0.93%.
Laurence Platt, a partner in Washington with K&L Gates LLP, said that, unlike typical loan purchase agreements involving private investors, contracts with the GSEs do not require the flaws cited as reasons for repurchase demands to be material. With private investors there is "kind of a no-harm, no-foul rule," he said. But "Fannie and Freddie have much more leeway to put back loans."
Joe Garrett, a principal at Garrett, Watts & Co., a consulting firm in Berkeley, Calif., said, "The thing that's really shocking people and dismaying people is having these loans put back when they're two or three or four years old."
Traditionally, he said, "if the borrower has been making his payments on time for a year or two or three … you would expect that you're home free."
David Stevens, the president and chief operating officer of Long & Foster Cos., oversees the Chantilly, Va., real estate brokerage's mortgage business. He said lenders are responding to the environment by "second-guessing the guidelines" set by loan buyers. "The investors that we sell our loans to are really holding us much more accountable and auditing us more closely, so we're scrutinizing quality," said Mr. Stevens, a former executive at Freddie and at Wells Fargo & Co.
Long & Foster has raised the credit score limits on some Federal Housing Administration programs and recently severed ties with a large brokerage when one of its brokers submitted two loan documents for one property.
"We're not tolerating anything that smacks of quality problems, so we cut off the whole account," Mr. Stevens said. "The rule used to be that if the investor will buy it, we would originate to their guidelines, but there is so much concern about quality that we're doing more than is required."
Mr. Stern at Lenders One argued that most of the loans being put back are "not going bad because of fraud" at origination, but because of "product features" like adjustable rates and an environment where tighter credit standards and lower appraisals make refinancing difficult.
"It can be two years, three years down the road and a file lands on our desk and it says, 'repurchase this loan due to fraud,'" Mr. Stern said. "It's impossible almost to run a business" when "at any time, files can be pushed back to you."