The mortgage dominos keep toppling. First the liquidity crisis, then the default disaster, and now another wave of repurchase requests and rescissions of historic proportions. Recently, the trade press has had weekly articles about the onslaught of repurchase requests and mortgage insurance rescissions. Many companies now have large backlogs of files to review in order to determine whether to defend or accept the action, and 2010 will bring an additional surge of put-backs. * As the government-sponsored enterprises (GSEs) and mortgage insurance (MI) companies work through their own backlogs, lenders will struggle to deal with the scale of this problem--much as servicers have struggled with the scale of the default crisis. * The available data on this issue are sporadic and not uniform in presentation, but what data are available make a compelling case for proactively dealing with repurchases and rescissions. * According to Freddie Mac's 2009 10K, the firm requested buybacks of more than $4 billion in 2009. Further, more than 30 percent of its buybacks have been outstanding for more than 90 days. On the mortgage insurance front, many companies have reported rescission rates of around 25 percent. Within Walnut Creek, California-based PMI Group Inc.'s 2009 10K, it disclosed more than $1 billion of rescinded and denied coverage on delinquent loans in 2009. * In a December 2009 report, Monoline Insurers Push Back on Mortgage Claims, New York-based Moody's Investor's Service estimated that $6 billion of mortgage-insurance rescissions have occurred since 2008, and it expects an additional $2 billion to $4 billion of claims in the next few years. * Many lenders have already created a process to deal with this issue, and we have seen cure rates as high as 50 percent. The top originators, and particularly those that were active in subprime and alternative-A, have been dealing with this issue for some time with the disastrous 2007 book year.
Lenders cannot dodge this fight, or necessarily win it. The best they can hope for is to duck the knockout punch and remain standing for the future.
Implementing a strong evaluation and defense process is the key to success and the only way to make it through this crisis. There is no silver bullet to make this problem go away, and avoiding the problem will only make it worse.
Of course, the best solution is high-touch loss mitigation to avoid losses altogether. However, once past that stage, the solution is to proactively create an organized process to deal with the onslaught. It is a great opportunity for the secondary marketing executive to lead a cross-functional team.
In our work as management consultants to the mortgage finance industry, Newbold Advisors has taken on assignments from origination startups to loss mitigation, and everything in between. Recent experiences establishing repurchase defense programs and providing subject-matter expertise for litigation strategy have been helpful to us in identifying best practices that improve the odds of success. Our current clients include a GSE, top lenders and servicers, private investors and mortgage insurance companies.
The purpose of this article is to make the case for an organized system to deal with this problem. We will outline the elements of a proven system and provide advice on how to make it work. The following are the steps we recommend.
Determine the goal and establish guiding principles:
* Is your company a long-term player or in run-off closing out bad books of business?
* Are you prepared to...