Identifying potential buybacks can be particularly challenging when refinancing application volume picks up as it did recently when rates dropped notably during a volatile period in the market.
Dan Cutaia, president, capital markets and risk management, Fairway Independent Mortgage Corp., said that while there is a temptation to rush when this happens, lenders are likely to be most successful in uncovering possible problems if they continue to take the time to review files thoroughly.
There is a lot you can do to identify possible buyback risks, at least in recent vintage production, according to Cutaia.
“The main risk is fraud,” he said, but he also emphasized—as he has in the past—the so-called operational risk involved in making sure that the fine details of procedures are done correctly is “probably more important today.”
Investors, he said, often can put back a file for just about any trivial errors.
Because of this he said it is key to establish carefully loan details like credit, income and assets.
“You want the file buttoned up,” Cutaia said, noting that ideally the information in the file would answer any question that might come up about the loan.
“Make sure your appraisals are done by qualified appraisers and that they are reviewed,” he said. “You have to read the entire report with a critical eye.”
He recommended having as much data as possible to support every valuation, such as comparable prices from the areas in question and automated valuation models. If some cases, lenders may even want to do a field review where another appraiser double-checks the value if material questions are raised about the property value.
Any of these steps help lenders identify situations where an appraiser might have made a critical error or purposefully attempted to misrepresent a value. Lenders, he said, need to be active in culling out appraisers.
When using fraud prevention screening automation, one has pay heed to “red flags” that come up. Like others, he advises looking at whether the same information is consistent at different points in origination process and validating Social Security numbers making sure they do not, for example, belong to a borrower who died in 1952. Cutaia said details about employers or properties might be checked against photos or other information on the Web. MERS information might be refreshed for accuracy.
Awareness of fraud-related potential buyback risk has come a long way as the market has evolved from one where credit scores were checked to one where “you check every line on the credit report” near closing as well as earlier in the process, Cutaia notes. But a surprising amount of fraud still persists.
Among other things to check for some of the latest forms of fraud, Cutaia advises being on the lookout for a relationship between the buyer and the seller in deals.
He said the big-ticket, albeit complex, nature of mortgage transactions, compared to, say, an ATM transaction, contributes to fraud's persistence in the industry.
“We've busted quite a few of these things and it's always funny when these guys are confronted,” he added. “There is just a plethora of rationalization.”
Some try to outwit the 4506-T, which allows lenders to double-check the borrower's tax return filed to get a mortgage against the one the IRS has on record. They do this by filing a tax return showing potentially more income than they have with the IRS, but then later extinguishing the tax liability and amending their return.
With fraud being this devious, one has to do more than rely on standard quality control checks.
“Overreliance on automation is a risk in and of itself,” Cutaia said, noting that fraudsters might be well schooled in standard industry processes and be looking for “gaps or chinks in the armor” of those who do not look beyond these.
“You have to look at everything, really, because things might be tied together,” he said.
While such steps can be taken for new production, “with the older stuff, you can't close barn doors, the horse is already out.” One can look for characteristics that generally make seasoned collateral more susceptible to potential buybacks, such as locations with heavy price depreciation and/or vintages from times with looser underwriting, but otherwise it is a matter of setting aside reserves and judiciously contesting repurchase requests.
“Anybody our size or even smaller that's not setting aside reserves, it's not just wise,” Cutaia said.
He advises in discussing potential buybacks with investors, maintaining good relationships with them to the extent possible, establishing credibility by making good in situations where there is a clear breach.
