Those mortgage loan brokers, correspondents and loan originators (“Originators”) who survived the onslaught of “repurchase/indemnification” claims asserted by loan aggregators and government-sponsored entities (GSEs) (collectively, “Investors”) that began with the advent of the Great Recession and to some extent are continuing today, are particularly well acquainted with Investors shifting the risk of a loss down to the Originators of mortgage loans (“Mortgage Loans”) originated prior to the Great Recession. The Investors sought to attribute the fault for what was clearly a global mortgage market meltdown (in which no segment of the industry was completely blameless) to the Originators.
Unfortunately, more than a decade later, we face a new global market disturbance, namely the coronavirus pandemic, and while its ultimate impact on the economy is still to be determined, the coronavirus pandemic has the potential to wreak havoc on the residential mortgage and homebuilding markets to an extent likely to surpass the disruption in these markets caused by the Great Recession.
Already, we have started to see signs of Investors seeking to protect themselves from exposure, such as by requiring certifications from Originators attesting that borrowers have not requested a forbearance of payments and related matters.
We have also started to hear concerns being raised by lenders of mortgage loan repurchase/line of credit facilities (“Warehouse Facilities”), in the form of such lenders seeking to tighten lending parameters, for instance, minimum FICO scores and maximum loan to value ratios. I can only speak to my own experience representing several mortgage originators before, during and after the Great Recession that the main “players” in this industry, for the most part, continued to lend to Originators without adjusting their lending criteria in any way that was meaningfully impactful on the businesses of the Originators. From a financial perspective, the lack of adjustment by lenders made sense to me given the very short time periods that such loans are held in the “warehouse”, and the reliance on firm takeout commitments or similar arrangements with the Investors that provided the lenders with their source of repayment. Moreover, very early on in the mortgage market meltdown, risky loan products (such as stated income loans) were no longer being originated.
However, the present situation seems markedly different. The current pandemic has impacted the global economy in a way that is far broader than seen during the Great Recession. We are now facing the risk of Mortgage Loan borrowers across all geographic locations and occupations losing their income sources either before or after loan origination. In that regard, I am truly not surprised by the measures taken to date by Investors and now by Warehouse lenders; both groups are laser-focused on mitigating this risk.
I believe that going forward, Originators will be increasingly pressured by their Investors and mortgage warehouse lenders to tighten their underwriting criteria, possibly to the point where some may no longer have viable origination businesses. Moreover, a new wave of buyback and indemnification demands is likely.
I would suggest to all Originators that sooner rather than later would be a good time to review the contracts they entered into with their lenders and Investors. As was the case with repurchase/indemnification claims asserted, I suspect that many claims will be asserted regardless of the actual terms of these contracts. In fact, I have already encountered that situation with a warehouse lender.
While, of course, there will be business decisions and compromises along the way that will transcend the terms of these contracts, Originators should start from a position of strength and know their rights under these contracts.
As we move forward, I plan to post follow-up articles that address issues and offer suggestions as to how to navigate the mortgage and homebuilding markets in these perilous times.