Wall Street Not Giving in on 'Buybacks'
Investment banking firms and other correspondent investors in nonconforming loans still aren't budging much when it comes to loan "buybacks," according to industry officials.
It's hard to determine exactly how much in buyback requests have been made this year, but industry executives continue to talk about the issue - mostly off the record. (Buybacks were cited in the failure of Acoustic Home Loans of California earlier this year, and played a role in MortgageIT, New York, selling to Deutsche Bank.)
Buybacks first became an issue in late 2005 when secondary market investors caught a breath from the production juggernaut of the past three years and finally took a microscope to all the loan files they'd been amassing. What they found - in some cases - didn't pass muster. The biggest issue was "early payment defaults," particularly on stated-income loans.
Meanwhile, one executive involved in due-diligence reviews said primary originators are getting sick and tired of buyback requests, and are even asking Wall Street firms to renegotiate their purchase contracts. The official said certain Street firms are willing to renegotiate, but that they definitely want something in return.
He said some investors are willing to wave buybacks but only if the primary funder sells the loan at a cheaper price. "For 25 basis points the seller can get better terms," said the official. Some Street firms are going so far as to ask for massive forward commitments in exchange for giving a break on buybacks.
Under standard "reps and warranties" a secondary market investor can request that the primary originator buy the loan back if a mortgage goes delinquent during the first 90 days. After 90 days the buyer of the loan is on the hook and has no recourse.
Over the past three quarters, Wall Street firms - including Bear Stearns and others - have been cracking down on early payment defaults by enforcing buyback provisions.
Lenders, though, want Street firms to be a bit more lenient because the mortgages they are originating - payment-option ARMs and stated-income loans, among others - are nonprime and carry higher profit margins.
Fraud is a key issue on the loans. Some sellers want language in their purchase contracts that require them to buy back fraudulent loans but only if the investor can prove the funder knew the loan was fraudulent in the first place.
"The Street isn't going for it," said one warehouse lending executive. The official said buybacks are "still a big issue," noting that subprime loans originated in 2005 are causing the most headaches.
Three investment banking firms that are active in the mortgage market - Credit Suisse, Goldman Sachs and Lehman Brothers - declined to comment on buybacks for this column.
One spokesman, quoting a mortgage manager at his firm, would only say that his company is seeing more buybacks. "But that's anecdotal," he said.
To date, banking regulators have focused on the risk consumers face on certain nonconforming products - particularly payment-option ARMs and interest-only mortgages. But given all the chatter we're hearing about buyback requests, in time, regulators may finally wake up and realize there's an institutional risk as well. Perhaps, some of the bellyaching is overblown, but when lenders start failing because they can't honor the buyback requests, you can bet that when you see smoke there's fire as well. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com