Independent mortgage banks have been coping with a still-surging wave of loan-repurchase requests from Fannie Mae and Freddie Mac that represents yet another threat to lenders’ already stretched balance sheets.
Much of the problem stems from the huge volume of low-rate loans originated in 2020 and 2021 at a time when the industry was continuously working to build capacity to deal with the explosive origination growth. That capacity issue, industry experts contend, resulted in a higher rate of underwriting errors than in more normal times that the agencies, Fannie Mae and Freddie Mac, are still uncovering as part of their ongoing quality-control checks — sometimes months or even years after a loan was originated.
There is a concern among IMBs, however, that Fannie and Freddie are being too aggressive in pursuing the repurchase option on loans with minor underwriting defects that could be cured far short of a draconian buyback demand. An executive with the Mortgage Bankers Association (MBA) confirmed the industry group is currently in discussions with the agencies over that concern.
The problem for independent mortgage banks (IMBs), particularly smaller to mid-size IMBs ($1 billion in originations or less) is that they have few good options for dealing with 2020 or 2021 vintage loans they end up repurchasing from the agencies. Those mortgages were originated at interest rates of 3% or less, and rates now are more than 3 percentage points higher.
Industry experts said most small and even midsized IMBs don’t have the ability to hold repurchased loans on their balance sheets, so they will likely have to turn to the whole-loan market to sell them.
“Those loans are going to be 20 points underwater, for the 3% to 3.5% kind of coupons, the 2021 kind of vintage” said John Toohig, head of whole-loan trading on the Raymond James whole-loan desk and president of Raymond James Mortgage Co. “It’s going to be in the low 80 cents on the dollar range.”
“… So, they’re probably looking at a loss, and you have too many of those, and you’re a thinly capitalized mortgage company, it’s not exactly what you want to see coupled with current [low] mortgage volumes.”
Brett Ludden, managing director and co-head of the financial services team at Sterling Point Advisors, which specializes in mergers and acquisitions, said as rough ballpark figure, some 50% of agency loan-repurchase requests end up resulting in a lender having to repurchase the loan, though he stressed each case is unique as are the appeals.
He added that loan defects often leading to repurchase requests include, among others, borrower income-related issues (i.e., debt-to-income ratios); appraisal issues; missing documentation; employment verification; and undisclosed liabilities — “people taking out a car loan the day before they close on their mortgage.”
“Issues related to appraisals and income are the highest areas of repurchases across the groups that we work with,” Ludden added.
Brian Hale, founder and CEO of consulting firm Mortgage Advisory Partners LLC, said lender decisions about how to handle repurchased loans in today’s market are typically made with the thinking, “What is the least-worst hit I’m going to take.”
The numbers
An analysis of recent U.S. Securities and Exchange Commission (SEC) filings by Fannie Mae and Freddie Mac shows that Fannie issued some $6.6 billion (based on unpaid principal balance, or UPB) in repurchase demands to bank and nonbank lenders and servicers on loans delivered to the agency over the 24 months ended March 31, 2022. That includes, current as of Dec. 31, 2022, $3.36 billion in repurchase demands for the 12 months ended March 31, 2021; and $3.24 billion for the 12 months ended March 31, 2022.
As of yearend 2022, SEC filings show that repurchase demands outstanding from Fannie Mae stood at $783 million, down from $939 million at the end of the third quarter of 2022, but up from $757 million as of yearend 2021 and $589 million as of end of the third quarter of 2021.
For Freddie Mac, which reports figures differently, some $4.2 billion (based on UPB) has been recovered via loan repurchase demands to bank and nonbank lenders since 2020, SEC filings show — with $3.3 billion recovered in total across 2021 ($1.4 billion) and 2022 ($1.9 billion). As of yearend 2022, repurchase requests issued and outstanding to bank and IMB loan sellers and servicers by Freddie stood at $1.3 billion, including requests for which appeals are pending. That’s the same level ($1.3 billion) at which outstanding repurchase requests stood as of yearend 2021, up from $500 million as of yearend 2020.
Hale said the repurchase demands impact IMBs more than the banks because “the delivery [of loans] to the agencies is disproportionately from independent mortgage banks.”
“We had two of the biggest years ever in the history of the industry back-to-back [2020 and 2021, when interest rates were 3% or less], and neither systems nor people or companies, for the most part, were prepared to handle the volume, and they worked from behind all the time,” Hale added. “And so, the rush to deliver created some quality issues in the industry, which could have easily been foretold.”
Hale said the agencies have up to 36 months from the date of loan origination to demand a loan repurchase, longer if fraud is involved, so that means there is still at least another year for the agencies to issues loan-repurchase requests for 2021 vintage loans.
“I would say there’s probably a fair amount of volume from 2021 that is still being reviewed,” said Dean Kelker, senior vice president and chief risk officer at SingleSource Property Solutions, a leading provider of property-related services across the loan-origination process and servicing cycle. “There’s a lot of money [to be recouped] from the Fannie and Freddie perspective in sending loans back to the originator for repurchase.
“The agencies got very aggressive after the Great Recession [as well] with repurchases. I think when they experience an inflow of money from repurchases, they become more aggressive.”
Ludden added that the rate of loan repurchases does appear to be increasing year over year, at least with Fannie Mae. He said an analysis of the loan-level data available publicly from Fannie Mae shows the following:
• “We are already over 90% of the way through 2020 repurchases. I believe we’ll end up with 1 loan repurchase for every 760 loans sold.
• “The 2021 vintage had the most repurchases in Q4 2022, but it does look like we are turning a corner earlier. While we have some analysis to do in the next week or two, I believe our model will target a 0.165% end-point for 2021 (1 loan repurchase for every 600 loans sold).
• “At this point, it is a little too early to say definitively but we will likely model a similar assumption for the 2022 vintage end-point as we assume for 2021 (1 loan repurchase for every 600 loans sold). Hopefully, with extra capacity, lenders observed better quality originations in 2022.”
Ludden added that “unless you are behind the curtain at Fannie Mae [or Freddie Mac], you don’t know “whether or not they’re just doing things faster, or whether they’re digging in their heels and forcing more repurchases.”
“Our analysis only looks at the end result, and there is certainly the possibility that you’re going to see a higher [rate] of repurchases requests occurring [going forward]. The good news is that it will be on a base of substantially fewer origination once you get into 2022 [vintage loans].”
The conversation
Pete Mills, senior vice president of residential policy and strategic industry engagement at the MBA, said there are “concerns over the rep and warranty framework” for loan repurchases and how it’s being applied by the agencies.
Mills explained that there are remedies far short of a loan repurchases for minor mortgage-manufacturing defects related to issues such as a borrower’s credit history, income or a problematic loan-to-value ratio — which fall short of fraud, misrepresentation, or eligibility issues.
Often those defects can be corrected by supplying additional documentation or via a loan-price adjustment to better reflect what the value of the loan should have been if the defects had been known at the time it was originated and subsequently sold to one of the agencies, Mills said.
“It’s especially important in this environment that [the agencies] don’t start every conversation with a repurchase request because you’re talking about buying a loan out that’s at [an interest rate of] 2.75% or 3% and it’s [now] a 6.5% market,” he said. “If there are alternative remedies that are appropriate, especially for a performing loan, then that’s how the conversation should roll.
“I do think it’s important in this environment, given the cost of originations and challenges we’re all facing, that people stay disciplined on both sides [lenders and the agencies] and [adhere] to the [rep and warranty] framework that we worked out, so that means the GSEs don’t start the conversation with repurchase when there is an alternative remedy for a performing loan,” Mills stressed.
“… We’re all concerned about affordability and cost,” he added. “Going back and forth on repurchase demands for weeks and months on a performing loan, when a [far less draconian] pricing adjustment would have solved the problem, does seem to add a lot of friction to the whole process.”
Mills said that the MBA is “in conversations” with the GSEs “to address these issues,” and it’s “an ongoing conversation.”
Officials from Fannie Mae and Freddie Mac did not answer HousingWire’s questions on the MBA’s concerns or “the ongoing conversation” between the agencies and MBA officials over loan repurchases.
In a prior interview on the topic of loan repurchases, however, a Freddie Mac official, who asked not to be named, pointed out that a defective loan that violates the rep and warranty framework was “never eligible to be sold to us [the agency] in the first place.”
“We do give them real opportunity to fix the problem,” the Freddie Mac spokesperson said. “Just because we issue a loan-repurchase request, that doesn’t mean the lender will end up having to purchase the loan back.”