The spike in loan buybacks and repurchase requests is a heated topic in the mortgage industry today. Lenders claim the GSEs (government-sponsored enterprises) are becoming more aggressive in their loan assessments. Other industry players suggest that the recent wave of loan buybacks is due to economic factors rather than changes to GSE underwriting processes.
No matter the reason for the increase in defective loans, one thing is sure: the volume of loan repurchase requests is creating a significant challenge for lenders of all sizes already contending with high inflation, high interest rates, and low origination.
In the last year alone, mortgage rates have nearly doubled while originations hit record lows. These economic adversities burden lenders struggling to add repurchased loans back to their balance sheets. Buybacks can be particularly adverse for smaller lenders not financially equipped to handle loan repurchases.
Why the sudden increase?
The uptick in loan repurchase requests may be partially attributed to increased focus on review and enforcement of defects during a period of lower loan volume in 2023. From 2020 to 2021, mortgage rates were extremelylow, with high volumes, and the mortgage market favored refinance loans. Fast forward to today, and the housing landscape has shifted from a refinance to a purchase market.
With the high volume of recent originations came an increase in underwriting errors. Some of the most common errors that trigger loan buybacks include undisclosed debt, issues with income verification, missing documentation, and incorrect employment verifications. GSEs are allowed to request buybacks for mortgages for up to three years after the loan is originated.
According to Freddie Mac, defects in mortgages of home purchases were found at a higher rate than in refinances. Defects found in purchase mortgages rose late in 2022, with repurchase requests reaching a high in 2023. According to Freddie Mac, purchase mortgages have nearly 35% more defects than refinances.
In 2024, focusing on loan quality needs to be on every mortgage lender’s radar.
Using Verifications of Income and Employment (VOIE) early in the lending process
From now on, lenders must utilize tools like third-party verifications of income and employment (VOIE) to reduce risk and potentially avoid defective loans. Although automation can help streamline the mortgage lending process, lenders may wait until too late in the mortgage lending cycle to pull VOIE.
To get the most out of instant and automated VOIE, mortgage lenders ideally would pull a VOI at the start of an application, a VOE during the underwriting and decision-making process, and then another VOE when the mortgage loan is being closed.
Solutions like instant employment and income verifications can assist lenders in securely obtaining accurate and up-to-date information. Lenders who want to ensure the quality of their loans must take a holistic approach that leverages relevant data at every stage of the lending process. This, coupled with automated income and employment verifications, helps improve the borrower and lender experience.
Limiting Manual Processes
When and how automated income and employment verifications are utilized can significantly impact the mortgage application process. An absence of speed and consistency can cause fissures between borrowers and lenders and, more importantly, lead to loan repurchase requests.
Mortgage lenders that let go of their reliance on paper-based income and employment verifications in favor of a data-backed automated process can expect to be more confident in lending and potentially reduce loan default rates. Moreover, effectively utilizing automated VOIE may alleviate the uncertainties of relying solely on paper-based processes.
Automated VOIE can also help mitigate errors when determining applicants’ loan repayment propensity, minimizing the risk of triggering a loan repayment. Lenders that utilize built-in decisioning criteria with every loan backed by data can reduce costs, labor, errors, and other oversights. As an approved data provider of the GSE data validation programs, verifications from The Work Number® by Equifax may help credentialed lenders mitigate the risk of repurchase threats.
The issue of loan buybacks will continue to impact the mortgage industry. Now more than ever, it’s essential that mortgage lenders look for solutions that can provide a reliable and accurate way to verify income and employment while ensuring that originated loans are of good quality.
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Tyler Brown, Alliance Manager, Equifax Workforce Solutions
Tyler Brown serves as alliance manager for Equifax Workforce Solutions. He has more than 13 years of experience in the mortgage industry. He works closely with mortgage lenders, regulators and other industry stakeholders to bring forth mutually beneficial data-driven solutions, fueling the opportunity for American consumers to better their financial lives. His efforts have helped to broaden homeownership opportunities by showing lenders the value of income and employment verifications, even in a volatile market.