Trend could spell the end for some lenders
Add loan buybacks to the list of things about which mortgage lenders should be wary.
Also known as a debt buyback, a loan buyback occurs when a borrower repays a portion of a loan for less than the promised amount. During a recent discussion at a mortgage industry conference, the topic came up as part of a troubling trend for which to look out in the coming months.
“Part of it is a cycle thing,” Phil Shoemaker, CEO of The Loan Store, said. “You go through these refi booms, Freddie and Fannie staff up and extend their audit cycle. And then refis go away and you go into a purchase market, now they have all these people to audit those loans.”
Shoemaker provided insight during a recent convention staged by the Association of Independent Mortgage Experts (AIME). He was joined on the panel discussion by Katie Sweeney, AIME’s chairman and CEO; Brendan McKay, president of advocacy for AIME; and Kelley Williams, partner with Forbes Tate Partners.
Brokers urged to support lender partners
“They start to audit those loans faster,” Shoemaker continued, referring to the GSEs. “It does change with the political environment, and right now the environment is very much to minimize the future risk that Freddie and Fannie might have. So they’re going through every loan they can and they’re looking for any specific reason they can find to push the loan back to the lender – which can be catastrophic,” he said. “The average loss when that happens can be from 12% to 25% of a loan amount.”
McKay put the matter into greater perspective: “Loan buybacks are up 750%,” he said. “Quarter 1 of this year compared to 2020, they’re up 750%. From a lender’s perspective, loans were 60 basis points more expensive to originate in the first quarter of this year compared to 2020. .That’s not sustainable. It’s a major problem. So when your lenders are reaching out to you on loans you closed months ago asking for your help getting additional stuff – and I know it sucks, I’ve been there – go the extra mile. Help them out. It matters.”
It’s an existential crisis for some lenders
It matters because, to lenders, the issue could prove to be an existential one, Sweeney suggested. The troubling trend has helped showcase the advantages to being an independent broker with a greater number of lenders with which to work.
“At this point, the benefit of being a broker is having access to as many lenders as possible,” he said. “Small to midsize lenders in particular, but even some of our larger lenders, are being put in positions where they may not make it in six months because of increased costs and the number of buybacks being sent back to their desks.”
The upshot: “It’s going to really minimize the amount of products you have access to, the amount of options you have to shop with,” Sweeney said.
And while the issue may seem like an abstraction to many now, she told the audience of brokers to expect experiencing the trend firsthand: “While this might seem like a distant issue for you right now and you may not have had a lender reach out to you with this conversation, you will,” Sweeney said. “They may not survive out of this market. Originations are clearly way down for every channel, plus an increase in expenses in an environment that truly cannot tolerate that sort of compression.”
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