Banking Law

Sunday, we discussed the fact that not only were some big mortgage loan seller/servicers "pushing back" on Fannie Mae and Freddie Mac when those GSEs try to force loan repurchases, but that the Mortgage Bankers Association was holding a series of seminars around the country for bankers on how to fight the repurchase requests. Today, Bloomberg.com reported that the MBA was taking "direct action," talking to both Fannie and Freddie and urging them to "ease back on the buybacks."

While his members ?certainly understand? their contracts require repurchases of defaulted loans when faulty appraisals, inflated borrower incomes or missing documentation are discovered, the Mortgage Bankers Association has started to ?aggressively? push the two companies and their regulator to ease up, [MBA president John Courson] said.

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?We?re trying to see if we can?t reach some type of a system that says there is a bright line out there, if this loan has been making payments and defaulted for a reason that is neither fraud nor related to the underwriting of the loan, it shouldn?t be subject to a repurchase,? he said.

We warned about these practices five years ago.

In good times, when the percentage of defaults is relatively manageable, the  purchasers of such loans (who customarily bundle and securitize them) tend not to look closely at these representations and warranties; however, in bad times, the holders of the loans have been known to require a second "scrubbing" of the loan files, looking for breaches of representations and warranties that will justify requiring the originator to repurchase the loan. In the last economic downturn, I personally experienced more than one instance of a mortgage lender suffering the infliction of extreme financial and emotional pain caused by buyback demands from secondary market purchasers like FNMA, FHLMC and private institutional investors.

What Courson and others are complaining about are teams of forensic examiners parsing a loan file when a loan defaults, looking for any purported defect that might justify a loan repurchase demand, even if, ultimately, most of the purported "defects" don't support the buyback demand.

?Lenders are getting repurchase requests on the same loan at multiple times for multiple issues, which shows you they?re going from station one, to station two, to station three? as the companies and their contractors ?scrub? loan files looking for errors that weren?t material or never occurred, he said.

Unfortunately, as we also pointed out Sunday, the lender ends up paying a lot of money to combat such requests, no matter how tenuous the justifications for the request. Lawyers make money, but the lender loses regardless of whether the loan is ever repurchased. As we all know, paying lawyers ranks right up there with coddling terrorists on a list of what most Americans like least to do.

As if Uncle Freddie and Aunt Fannie weren't generating enough pain through their own efforts, it appears that they're getting help from private mortgage insurers. Bloomberg reports that many of the insurers are picking every nit they can find to deny insurance claim requests, which, in turn, causes a default under Freddie and Fannie guidelines. It's loads of fun out there, isn't it?

The biggest four banks are now the biggest loan servicers. In Fannie's and Freddie's world, a putback is made by the GSE to the servicer, who is liable to the GSE for breaches by its predecessors in title to the loan. The servicers are trying to pass the buck back on down the line. I'm sure that they're finding that's a futile exercise when the loan originator was one of the many independent mortgage "bucket shops" that has gone to the big mortgage banker graveyard.

To loan originators that are still around and still solvent, the world is a scary place.

Repurchases will be ?an issue for the next 24 to 36 months for all us,? Steven Jacobson, chief executive officer of Madison, Wisconsin-based Fairway Independent Mortgage Corp., said in a May 24 interview at a conference held in New York by the Washington-based Mortgage Bankers Association. The company last year originated more than $3 billion in mortgages. ?Any big bank can put any one of us out of business.?

Guess what: the adage "cleanliness is next to godliness" applies not only to personal hygiene, but, these days, to residential mortgage loan originations, as well.

Y'all have a happy holiday weekend.