Is there any enjoyment derived from two people punching each other until one drops to the ground? To me, there isn't, but I’m sure plenty of boxing fans would beg to differ.
Boxing reminds me a lot of today's lenders. Most lenders get into the ring every day, fighting until someone drops. The reason however is not to win a match, but to prevent a repurchase.
Just ask the staff of any lender. They will tell you that the biggest risk they face is the risk of repurchase. In fact, many will say that quality loans are those that don’t have to be repurchased. Is that how the industry should be defining quality loans? How did we get to the point that we are more worried about what will happen after we produce a loan, rather than making sure we produce it correctly in the first place?
There are two reasons for these boxing matches. The first is that the agencies seem to forget that we are in the business of risk. Trying to find just any problem to justify forcing a repurchase for a defaulted loan is counter to the purpose of a guaranty fee.
Secondly, we refuse to accept the fact that there is a clear relationship between processes and performance. Failing to manage process risk creates a high probability that many of the files will have errors that can lead to default. In my opinion, worrying about individual mistakes is like trying to prevent accidents. Preventing process risk is stopping a war.
In other words, I believe the agencies need to look at loans holistically, rather than focusing on individual issues or errors. They should also be able to justify that the issue they are citing as the reason for repurchase is actually a driver of the default.
For repurchases to be fair, there should be a cause and effect relationship. So rather than looking for possible issues to throw back to the lender after a loan defaults, the agencies should be able to prove that the issue or issues cited caused the default. In too many cases, this cause and effect relationship is missing, and random and unforeseen risk is what triggered a default. Random risk is what the guarantee fee is supposed to cover, after all. Yet every day lenders continue to face a battle in fighting repurchase requests.
Which brings me back to boxing. As lenders go toe to toe with the agencies, let’s make sure it’s at least a fair fight. It's time for the industry to independently establish these relationships so that they can be addressed at the time the loans are purchased and not have to do battle years later.
