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January 27, 2021

How to Minimize Buyback Risk in 2021

"Given the variables driving today’s environment, high-quality loans and surpassed capacity-limits, may continue, lenders can minimize their risk of buybacks by keeping their regtech in top shape."

How can mortgage lenders stay from buyback risk in 2021?

DENVER; Jan. 28, 2021 - Buyback risk in 2021 is a buzzing topic. When the market heats up and lenders see increased competition, there is the tendency to see more fraud and loan defects flowing into pipelines, especially for correspondent and wholesale lenders. These, if not checked, could lead to buyback requests from investors.

Some have wondered whether we will see increased buybacks in 2021, given the very high volumes the industry experienced in 2020. Some experts expect to see higher defect rates as the refinance business cools and complex purchase money mortgages begin to take up a larger share of the business.

While we saw an increase in mortgage fraud risk this summer as the pandemic began to impact the industry and purchase defect risk rose, the First American Loan Application Defect Index showed an overall decrease in loan applications defects from 2019.

Why lenders are safer from buybacks

In my perspective, lenders are safer from buybacks today than they have been in the past due to a few factors. Today’s environment is different than what we usually see driving investors’ buyback requests because lenders are still underwriting high quality loans and have access to regulation technology (regtech).

While bad loans aren’t to blame, today’s high loan volumes pile pressure on overworked loan production staff. Driven by surpassed capacity limits, the subsequent sloppy work and mistakes increase the overall risk of loan defects.

This heightened risk from loan defects results in quality assurance and quality control (QA/QC) resources needing to do rework on these impacted loan files to get them ready for sale into the secondary market. This is not the same as trying to sell low quality loans and hoping the investor doesn’t force the lender to buy them back, which is what we tend to see driving buyback requests.

Furthermore, lenders have access to regtech to minimize these capacity-driven defects. Today’s loan production technology is built on a solid foundation aimed at ensuring full compliance. The modern loan origination system (LOS) has regtech integrated into the platform such that impacted loans will fall out of automation and come to the attention of QA/QC resources.

This is good news because hoping for a slowdown in mortgage loan volume to solve capacity problems in the lender’s shop is not a safe or effective strategy.

Why the mortgage business will remain hot

There are two reasons that I see mortgage loan volumes remaining high through most, if not all, of 2021. They have a supply and demand relationship. From a 50,000-foot view above, both reasons are heartbreaking.

1. The Supply Side

The pandemic has driven people out of existing homes, whether they became sick and passed away or had to sell their existing homes due to losing their jobs due to the pandemic. While those who fell victim to the virus were mostly older Americans, the latter of the two were mostly blue collar or service industry workers. These groups lived in smaller homes which builders have deprioritized building because they are less profitable than larger homes.

2. The Demand Side

These smaller homes are perfect for first time homebuyers, which make up about a third of the new home loan market. The result is that more real estate inventory has become available, solving a problem the industry had been facing for the last few years. First-time homebuyers will continue to be attracted to this new inventory, which I expect to keep loan volumes high.

How lenders can stay safe from buybacks

Given the variables driving today’s environment, high-quality loans and surpassed capacity-limits, may continue, lenders can minimize their risk of buybacks by keeping their regtech in top shape.

Contact us today to learn more about how you can reduce your loan quality problems, streamline your automation and implement effective compliance risk technology.

By Joe Camerieri, EVP, Client Account Management at Mortgage Cadence

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