Residential lenders can now purchase insurance coverage for loan buy-backs. Word of the new policies came as mortgage bankers meet at their annual secondary marketing conference.
Repurchase expenses have been eating into bank earnings. During the first quarter, JPMorgan Chase & Co. reported $364 million in repurchase expense, while the charge was $312 million at Wells Fargo & Co. and $282 million at Bank of America Corp.
Between them, the three companies have more than $20 billion in outstanding repurchase demands.
And repurchase charges are unique to big banks; lenders of all sizes are reporting ongoing repurchase expense.
Ellie Mae, which hopes to help lenders avoid repurchase liability, put total repurchases at around $100 billion during the past several years.
The Pleasanton, Calif.-based company, which is a Mortgage Daily advertiser, said that buy-back insurance is being added to its “Total Quality Loan” program. The initiative reportedly enhances loan quality, compliance and salability of mortgages that are processed through Ellie’s Encompass360 mortgage management software system.
The policies, brokered by Arthur J. Gallagher Risk Management Services Inc. and underwritten by affiliates of Lloyd’s of London and Liberty Mutual Group, insure correspondent lenders for up to $100,000 per loan.
Lenders are covered for losses that result from borrower and appraisal fraud as well as regulatory non-compliance.
“For example, the policy covers a seller against claims based on misstatement of income or assets, employment and occupancy fraud, as well as collateral and valuation fraud,” Ellie said. “Similarly, it protects against loss if a loan is found to be non-compliant with various regulations, such as Federal Truth in Lending Act Tolerance Tests; Federal, State and Local High Cost Thresholds Review; Fannie Mae Points & Fees, and ‘HUD-HOEPA’ Mortgage Thresholds Reviews.”
Coverage, which starts on the origination date, stays in effect for three years. Coverage transfers between lenders when the loan is sold.
Ellie suggested that the “modest cost” of coverage can be offset by lower loan reserves needed for insured loans. Ellie said it earns an administrative fee for each policy sold.
A proof of claim can be filed when fraud or a compliance error is discovered even before the amount of the loss has been determined. The process is designed to enable efficient repurchases, scratch-and-dent sales or foreclosure processing.
Ellie’s announcement came on the same day that the Mortgage Bankers Association hosts multiple sessions at its National Secondary Market Conference & Expo in New York. The conference kicked off Sunday and runs until Wednesday. Ellie is attending the event, according to MBA.