TheMReport — News and strategies for the evolving mortgage marketplace.
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20 | M R EP O RT FEATURE I t's been some time since repurchase risk was a focal point of the mortgage industry. But those who were around during the last housing crisis can remember quite well the days when, if you could sign a note, you could sell a loan. It left a big impression on me because it made me realize the impact of sound underwriting practices and loan due diligence, which is what my career became focused on. As we see the market expand- ing in purchase originations and new loan products, many are asking whether we are dig- ging ourselves into a hole once again. Personally, I don't think so, since underwriting standards are significantly higher than they were 15 years ago. However, with the market transitioning away from refinances toward purchase loans, repurchase risk is likely to become a focal point in the new year. For this reason, now is a great time for originators to consider whether they are deploying the right tools and strategies to minimize risks, so they can hit the ground running in 2022 with confidence. The key is view- ing quality control not as a cost center, but as an investment that ensures you're going to be suc- cessful in the years ahead. Repurchase Risk Will Grow T he good news for lenders is that purchase mortgage originations should increase next year. The Mortgage Bankers Association, for example, predicts these originations will grow 9% to a record $1.725 trillion. Yet ac- cording to a recent STRATMOR Insights report, lenders are con- cerned about how they are going to keep pace with volume while maintaining their profit margins, as purchase loans are invariably more complex and therefore more costly to produce than refinances. One factor behind the growing origination costs is compensation. Loan officers who specialize in purchase loans are usually paid more, because they have spent years building relationships with buyers and referral partners. Many lenders have also been ramping up their recruiting cam- paigns to find these top perform- ers and take advantage of their relationships, which translate into additional volume. Yet these days, with fewer quick-turnaround refinances and housing supply strained to meet demand, a loan officer's relationships may take longer to develop into home sales and closed loans. With housing inventory so tight and intense competition taking place between buyers in many markets, it can take up to six months to work with some- one before they become a buyer. When they do, purchase contracts are often written with shorter turn times so that borrowers can be more competitive with cash borrowers—which brings addi- tional pressure on lenders to close quickly and on time. The readi- ness of a lender's staff to enable this, with no increase in defects, may be challenged as lenders shift resources and ramp up purchase underwriting skills, which may open the door to additional risk. Currently, a growing area of risk for purchase loans are appraisals, which is understand- able given the rapid rise of home values and the pressure to turn appraisal reports around quickly. Furthermore, with Fannie Mae and Freddie Mac both incorpo- rating desktop appraisals into their selling guides, it becomes important to ensure that post- close quality control include the completion of a Collateral Risk Assessment questionnaire (or similar review method) by a skilled subject matter expert on appraisal theory and that it is included as part of the loan-level reporting package. Another area of concern stems from the number of recent streamlined refinances that have been underwritten with limited borrower credit documentation and underwriting. For many lenders, it will be a challenge to break out of that streamlined refi mindset and make sure they have the skills to calculate income and perform the kind of diligent underwriting that is required for purchase loans. Automated income calculation tools can certainly help to create more consistent decisioning and accom- modate skill gaps. The rapid rise of QM loans is yet another factor contributing to Why Repurchase Risk is Growing—And How to Manage It Quality control should be viewed not as a cost center, but as an investment that ensures future success. By Rick Hall