It has become rarer for banks and lenders to hold the loans they originate. One factor linked to tight credit is the process where loan investors force lenders to buy back mortgages they sold to the investor. In this case, the investors are the FHA and GSEs. These buyback requests occur when the FHA, Fannie Mae or Freddie Mac receive loans that do not meet their standards. While academic studies have shown that the incidence of these repurchase requests have dropped to historic lows in recent years, the fear of reputational risk and potential costs remain elevated.
Lenders Feel the Pinch
85% of participants in the 4th quarter Survey of Mortgage Originators indicated having been the subject of a repurchase request between 2009 and 2013. Of those, more than 60% resulted in a buy-back, while the remaining 41% were resolved without one. Furthermore, 90% of respondents indicated that repurchase requests from aggregators or investors impacted their willingness to lend, 40% significantly so. Repurchase requests were the leading factor cited by survey participants as driving reluctance to lend to borrowers with greater risk (e.g. FICO<640, higher DTIs, and low down payments).
The agencies made overtures to ease lender concerns about buy-back risk in recent months through their representation and warrant policies. An estimated 40% of respondents indicated a modest improvement in willingness to lend to riskier borrowers as a result, while an equal share indicated that the changes would have no effect. A fifth of respondents indicated that they would wait and see.
Of the suggestions that would improve credit availability, 25% of respondents cited more clearly defined rules that determine repurchase risk. An additional 12.5% cited allowing indemnification for minor infractions rather than repurchase of these loans, while 12.5% indicated that no changes would ameliorate their concerns.
Government attempts to ease lenders’ concern appears to have worked to a degree, but more change to programs or perception may be necessary. Though the government has made a concerted effort to shift repurchase requests closer to origination, historically they have come when loans default. Furthermore, private aggregators and the FHA have sued originators whom they purchased loans from. Thus, the market may have to wait for another housing cycle and rise in defaults for lenders to observe the government’s actions before they wade back into the deep end of the market en mass.