Solutions Mitigate Loan Repurchase Loss Severity
Insiders agree that certain types of solutions can serve as an antidote to the still pervasive mortgage loan repurchase challenge.
It is fueling a renewed drive to design tools that infuse all aspects of the mortgage production chain into coherent systems that are more efficient and transparent throughout the life of the loan.
“Over the past several years, the GSEs and investors have put back approximately $100 billion worth of loans to originators,” said Richard Roof, senior vice president of business development at Ellie Mae Inc. of Pleasanton, Calif., and it is why there is a need for tools that provide a direct response to demand for increased quality assurance from investors, servicers and sellers. Optional buyback protection is a cost-effective extension of the concept now adopted by many in the industry to further mitigate loan delinquency and repurchase risk, he adds.
“The traditional approach has been to perform an audit at the conclusion of the loan, before closing, but that’s not good enough anymore,” said Dominic Iannitti, president and CEO of DocMagic Inc., Torrance, Calif., a provider of mortgage loan document preparation and delivery solutions.
He has been calling on originators to integrate automated loan file audits in their workflow throughout the mortgage production chain, from the time borrowers submit an application to the time loan files are packaged for investors, delivered to the secondary market and “every stage in between.” Compliance monitoring at every stage of the loan production process following investor guidelines and compliance requirements ensure that “down the road, lenders won’t be plagued by repurchase demands.”
He argues that evidence of problematic mortgage loan files persists. One example is the fact that various lenders owe billions to Fannie Mae for their troubled loans. Fannie, which remains the largest purchaser of residential mortgages in U.S., reported in February 2012 that it made a total of $23.8 billion in repurchase requests from lenders during 2011, compared to $13.1 billion in 2010.
Apparently many mortgage banks are steps behind when it comes to embracing the loan review technology that exists today. Such tools can help users review loans at every step of the process and in a fraction of a second, he says. DocMagic’s audit engine is one of many examples of compatible tools capable to perform over one thousand compliance, regulatory and investor guideline checks, along with data analytics.
The integration of automated audits into production workflows also helps lenders eliminate the need for separate compliance vendors, he added. “Data integrity is essential to the entire origination cycle,” as lenders need to be aware of data changes or information lost during loan processing. Technology automatically detects all degradation of data, allows lenders to make interim checks on loans immediately after the initial stage of disclosures to the borrower, as well as deliver alerts that reveal full details about a potential problem and why it may demand immediate attention.
DocMagic tools used as part of the firm’s platform or as customized standalone solutions that can significantly expand users’ auditing capabilities. It provides checks for compliance with various regulations such as the Federal Truth in Lending Act Tolerance Tests or Regulation Z, the Mortgage Disclosure Improvement Act, and applicable federal and state audit tests including Fannie Mae or Freddie Mac guidelines.
Similarly, to protect mortgage banks against fraud and compliance claims, Ellie Mae recently added a loan buyback insurance option to its Total Quality Loan program—as a measure to help enhance mortgage loan quality, compliance and salability for loans processed through the firm’s Encompass360 mortgage management software system. It offers customizable fraud detection, valuation, validation and risk analysis services and is underwritten by affiliates of Lloyd’s of London and Liberty Mutual Group.
Correspondent lenders can be covered for losses of up to $100,000 per loan. The insurance policy protects lenders from borrower and appraisal fraud and regulatory noncompliance losses. Examples include coverage of a seller against claims based on misstatement of income or assets, employment, or collateral and valuation fraud. It protects against loan losses due to noncompliance with regulations, such as the Truth in Lending Act or other federal, state and local mortgage cost thresholds reviews.
The coverage begins at the date of origination and lasts for three years. It is automatically transferred with the ownership of the loan to help discover file errors as they happen and allow file claims under the policy directly “rather than force the loss back to the original lender.”
While there is “a modest cost to the lender for this coverage,” executives said, it can be offset by lower loan reserve requirements available to lenders with insured loans.
The program is innovative because it enables the party suffering a loss to file a proof of loss and determine whether or not it is covered before the amount of the loss has been determined, executives said. Often, insurance providers’ practices have prevented policyholders from learning whether or not coverage exists until more than one recourse option has been completed or has lapsed. To avoid that the policy ensures coverage is available before repurchases, scratch-and-dent sales or foreclosure option assessments are started.