A new insurance product designed by Bakerjian Insurance Services aims “to protect lenders against potential damage” from repurchase demands from investors that may have originally been caused by fraudsters.
The Novato, Calif.-based company said it created Lenders Misrepresentation Insurance to serve as a policy that protects lenders from buyback requests that are based on “material financial misrepresentation” in the borrower’s loan file.
For a premium the LMI program provides loan level protection for three years.
Company executives said the program responds to recent research findings showing increased fraudulent activity often due to “repurchase exposure.” For example, according to the Financial Crimes
Enforcement Network, activity related to possible mortgage fraud increased nearly 7% during the first half of this year.
The firm’s president and CEO, Stephen Bakerjian, who originated the program, said the goal was to create an insurance solution that transfers loan risk by providing a “multiplier of protection” for every dollar of premium as it transfers the risk to the insurance carrier.
He argues that this option is more reasonable than ensuring dollar-for-dollar protection through loan-loss reserves that retain the risk with the lender.
This risk management tool for lenders also has the advantage of avoiding that reserves are treated as retained earnings on the lender’s balance sheet, “which would have negative tax consequences,“ he said. LMI offers “better protection for a lower cash outlay,” plus the premium is treated as an expense, so it is tax deductible.
During the past four years Bakerjian worked to develop and market test LMI before launching it shortly after his new company started its business operations on Dec. 1.
He told this publication that in many ways LMI summarizes the expertise he gathered during the past 10 years working in various property casualty insurance executive roles and lessons learned from the first mortgage fraud insurance product he designed almost a decade ago.
“We’re covering a financial misrepresentation,” he said, and three years “is a logical number of years” since 36 months is approximately how long it takes a repurchase demand to go through the system.
Three years also is enough time to detect fraud—if that is the case. As a rule, he said, misrepresentations that emerge after 36 months are more likely to derive from other reasons, such as catastrophic family situations that may include death, illness, or divorce, not fraud.
As to the premium charged for LMI, the cost is based on basis points, not percentages, he said, without specifying. Ultimately, he argued, LMI ensures “the characteristics of each individual loan” originated or purchased by the entity that is the beneficiary of the insurance, “for a very small premium.”
Since data indicate continuous growth in mortgage fraud, fraud insurance is an issue that does not solely affect financial costs and loan risk. It also increases a firm’s reputational risk—which has the power to damage lender-investor relations.
