Loan Buybacks Hurt Small Firms

WASHINGTON-Increasing demands for buybacks and indemnifications on bad loans are becoming a larger drain on small mortgage companies and servicers.

A Mortgage Bankers Association survey shows that repurchase and reserve costs for small lenders rose to $134 per loan in the fourth quarter, up from $75 per loan in the prior quarter.

This number reflects cost of reimbursements for relatively new loans and loans originated years ago with significant deficiencies.

As loans go into default or foreclosure, servicers review these loans for breaches of representations and warranties, inflated incomes or appraisals that could trigger a request for the original lender to buy back the loans or indemnify the investors or insurers for losses.

In 2008, the cost of repurchases and reserves was $59 per loan.

Fortunately, 2009 was a very profitable year for the small lenders and they could easily absorb the extra expense.

However, there was a drop in secondary market gains on the sale of loans to aggregators and correspondent lenders between the third and fourth quarters.

MBA researchers suspect the independents may be paying indemnifications in the form of a reduced gain on sale.

The MBA survey on profitability covers 159 independent mortgage banks and 41 mortgage subsidiaries of banks and thrifts.

Average loan production for the firms nearly doubled to $933 million and they posted $4.9 million in pretax profits, compared to only $700,000 in 2008. Average profit per loan was $1,135, versus $305 in 2008.

Only 4% of the respondent companies reported losses for 2009.

"Production profits increased in 2009 over 2008 as higher origination volumes, particularly in refinancing, reduced per-loan production expenses," said Marina Walsh, MBA's associate vice president of industry analysis.

The report shows that the "net cost to originate" dropped to $1,628 per loan from $2,291 in 2008.

However, MBA researchers noticed a widening difference in profitability between the bank subsidiaries and the independent mortgage companies.

Historically, bank subsidiaries have lower overhead and compensation expenses and the independents made up for that by generating higher revenue.

But now the independents' net production income is lower than their bank and thrift peers.

Profits for the bank mortgage subsidiaries averaged 79.5 basis points per loan, compared to 55 bps for independents.

"It was clear bank and thrift subsidiaries had an advantage over independent mortgage companies because of lower loan officer compensation per loan," Walsh said. But the bank subsidiaries also benefited from "higher net interest spread due to lower warehouse funding costs and the ability to keep loans in warehouse longer," she said.

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