Fitch: Loan Repo Rise Not a Trend

Meanwhile, a new Fitch Ratings report says the recent rise in U.S. loan repurchase activity is likely a "self-correcting mechanism" rather than the beginning of a troubling trend.Although early payment defaults were the root cause of rising repurchases, the report contends that secondary-market behavior was largely responsible for the unexpected repurchase provisions recognized by some mortgage originators. "Fitch explores the accounting for mortgage loan repurchases and suggests that investors would benefit from more disclosure, especially where repurchase charges spike and materially affect earnings," the rating agency said. Although the effect of alternative mortgage products and adjustable-rate mortgage resets has yet to be felt, Fitch said it views the recent repurchase uptick as a rational, self-correcting mechanism. But in the longer term, as originators take steps to prevent early payment defaults, Fitch said loan repurchase activity should normalize. Vincent Arscott, a director in Fitch's financial institutions group, said mortgage originators are tightening underwriting guidelines to prevent loan repurchase requests as a result of EPDs.