At last week’s Mortgage Bankers Association (MBA) annual conference in Chicago, Bob Siegel and I attended a panel discussion on “preventing buybacks.” Virtually the sole focus of that session was on steps that loan originators can take to reduce the likelihood of errors in the origination process.
Accuracy, and elimination of errors, should of course be an objective of loan originators — but the stunning part of the panel discussion that we witnessed was that the MBA conference panelists seemed to believe that any error justifies a repurchase or indemnification demand! Nothing could be further from the truth, legally or factually.
Many Reasons Why A Repurchase Or Indemnification Demand May Be Unjustified
To understand why this is so, consider just a few of the many reasons that a repurchase or indemnification demand might be completely unjustified:
- What if the alleged error did not relate to a material fact?
- What if the alleged error was not the cause of the investor’s loss?
- What if the investor has suffered no loss at all?
- What if the investor easily could have avoided suffering a loss?
- What if the party making the demand does not own the loan, and has made no indemnification payment related to the loan?
- What if the party making the demand does not have a contract with the party receiving the demand?
- What if the demand appears to be late or untimely?
- What if the party making the demand has already been made whole for its loss by some other party, like a mortgage insurer?
These and many other issues may establish that there simply is no legitimate basis on which an investor may seek a buyback payment. And yes, this applies even to full-doc loans going forward, not just the reduced doc loans of years past.
Loan originators must not fall into the trap of believing that they are financially responsible for every error that is subsequently uncovered on a loan application or in a loan file. Working to promote accuracy is great, but correspondent lenders need not be perfect in order to prevent buybacks.