A new insurance product has been designed by Bakerjian Insurance Services “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 will protect 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% in the first half of the 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 is a much better option 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.
Since data indicate continuous growth in mortgage fraud, it is an issue that goes beyond financial costs and loan risk because it also increases reputational risk that has the power to damage lender-investor relations.
