As
of
third-quarter
2023,
the
most
recent
data
available,
Freddie
Mac’s
repurchase
volume
was
$384
million,
with
Fannie
Mae’s
volume
at
$382
million.
The
report
notes,
however,
that
“in
Q3
2023,
Freddie
repurchases
fell
35%
from
the
prior
quarter
while
Fannie’s
fell
only
12%.”

Brett
Ludden
is
managing
director
and
co-head
of
the
financial
services
team
at
Sterling
Point
Advisors,
a
merger
and
acquisitions
advisory
firm.
He
is
also
the
co-founder
and
managing
partner
of Augment
Analytics.

“We’re
seeing
a
downward
trend
in
total
[loans]
repurchased
[on
a
dollar
basis],
and
that’s
true
for
both
Fannie
and
Freddie,”
Ludden
said.
“I
anticipate
that
trend
continues
for
both.

“…
But
the
data
[for
Q3
2023]
indicate
that
Freddie’s
repurchase
rates
are
going
down
at
a
much
faster
pace
[than
Fannie’s].
…
We’ll
get
more
definitive
data
when
we
get
the
fourth-quarter
results
to
see
if
the
trends
continue
at
that
point.”

A report
from
the Urban
Institute focused
on
Fannie
and
Freddie
loan
repurchase
rates
shows
that
the
GSEs
in
recent
years
“have
become
more
aggressive,
forcing
more
repurchases
earlier
in
the
life
of
the
loan
than
was
the
case
in
earlier
vintages.”

The
Urban
Institute
report,
published
in
November
2023,
shows
that
the
average
number
of
months
from
origination
to
repurchase
between
2005
to
2008
(prior
to
and
during
the
early
stages
of
the global
financial
crisis)
was
46
months
for
Freddie
Mac
and
52
months
for
Fannie
Mae.
From
2018
through
Q1
2023,
however,
that
same
figure
was
11
months
for
Freddie
and
13
months
for
Fannie.

Policing
loans

Even
as
the
agencies
have
become
more
aggressive
in
loan
repurchases
in
the
past
several
years,
particularly
in
the
wake
of
record
origination
volumes
in
2020
and
2021,
data
seems
to
indicate
that
lenders
have
also
become
more
vigilant
in
policing
loan
originations
to
ensure
quality
control
(QC).

ACES
Quality
Management,
a
fintech
that
provides
quality-control
software
for
the
financial
services
industry,
issued
a Mortgage
QC
Industry
Trends report
with
data
through
Q3
2023.
The
report
provides
a
quarter-by-quarter
critical-defect
rate
for
mortgages
(primarily
Fannie,
Freddie
and Federal
Housing
Administration loans)
that
were
analyzed
via
its
software.

According
to
the
ACES
report,
the
critical-defect
rate
declined
from
2.47%
in
third-quarter
2022
to
1.67%
in
Q3
2023,
the
most
recent
data
available.
The
report
defines
a
critical
defect
as
one
that
“would
result
in
the
loan
being
uninsurable
or
ineligible
for
sale.”

One
of
the
QC
efforts
now
underway
to
stem
agency
loan
repurchase
demands
was launched
by
Fannie
Mae
this
past
September.
It
mandates,
among
other
measures,
that
companies
that
sell
loans
to
the
agency
must
complete monthly
prefunding
reviews on
either
10%
of
its
prior
month’s
loan
originations
or
750
loans,
whichever
is
less.

Because
loan
repurchase
data
from
the
GSEs
is
only
current
through
the
third
quarter
of
2023,
it’s
still
too
early
to
tell
if
Fannie
Mae’s
program
will
have
a
material
impact
on
its
repurchase
demands.

“Repurchases
have
been
a
hot
topic
for
lenders,
and
to
some
degree,
the
agencies
and
investors
have
gotten
a
bad
rap
in
these
discussions,”
said Nick
Volpe,
executive
vice
president
of
ACES
Quality
Management.

“It
makes
sense
that
the
investors
are
asking
lenders
to
ward
off
as
many
problems
as
possible
[via
QC
efforts] before
a
loan
is
made. 

“The
overarching
goal
of
prefunding
QC
is
to
ward
off
problems
before
they
become
issues
on
closed
loans. The
problem
obviously
is
bad
loans
that
lead
to
repurchase
and
indemnification.”

Non-QM
vigilance

Pamela
Hamrick,
president
of

Incenter
Diligence
Solutions,
which
provides
due-diligence
reviews
and
document
management
services
for
the
mortgage
industry,
said
that
prefunding
reviews
are
also
gaining
more
traction
in
the
nonqualified
mortgage
(non-QM)
space.

Non-QM
loans
are
those
that
cannot
be
purchased
by
the
GSEs.
The
pool
of
non-QM
borrowers
includes
real
estate
investors,
foreign
nationals,
business
owners,
gig
workers
and
the
self-employed,
as
well
as
a
smaller
group
of
homebuyers
who
face
credit
challenges,
such
as
past
bankruptcies.

“There
are
a
lot
more
of
the non-QM
and
DSCR (debt-service-coverage
ratio)
loans
than
there
have
been
in
the
past,”
Hamrick
said.
“And
those
loans
are
historically
riskier
than
a
typical
conventional
loan.”

She
added
that
a
growing
share
of
non-QM
lenders
are
starting
to
“embrace
more
QC
prefunding
eligibility
reviews
…
because
they
have
major
concerns
about
liquidity
in
the
secondary
market
for
their
non-QM
and
DSCR
loans.” 

“If
a
lender
closes
a
loan
and
a
mistake
is
discovered,
it’s
likely
that
their
loan
won’t
get
purchased,”
Hamrick
explained. “So,
having
a
prefunding
eligibility
review
better
ensures
that
the
loan
transaction
can
be
problem
free.”

John
Levonick is
a
senior
partner
with
the
law
firm Garris
Horn
LLP,
which
serves
mortgage
companies,
secondary
market
investors,
quality
control
firms,
third-party
review
firms
and
others
in
the
financial
services
space.
He
also
previously
served
as CEO
of
Canopy,
a
third-party
review
firm.

Levonick
said
that
in
today’s
market,
the
economics
have
shifted
toward
encouraging
more
quality
control
reviews
at
the
originator
level.

“The
presumption
is
that
the
investors
give
better
pricing
for
the
loans
if
they
have
been
[run
through
a
quality
control
review]
by
the
originator,”
he
added.
“And
when
that
happens,
the
investor
will
purchase
the
loans
and
also
purchase
the
rights
to
the
due
diligence
through
what’s
called
a
reliance
letter,
which
permits
the
investor
to
rely
on
the
work
done
for
the
lender
as
if
it
was
done
for
the
investor
[satisfying
regulator
and
rating
agency
requirements].

“So,
the
lender,
regardless
of
size,
has
to
come
out
of
pocket
and
pay
for
the
due
diligence,
but
then
they
allegedly
recapture
that
cost
through
better
execution
[of
the
loan
sale
to
the
end
investor].”

A&D
Mortgage is
one
example
of
an
originator
that
is
committed
to
prefunding
quality
control
reviews. Alexander
Suslov,
the
company’s
head
of
capital
markets,
said
that
originators
perform
prefunding
reviews
on
100%
of
A&D’s
overall
loan
production,
including
its
non-QM
originations.

“Because
we
do
100%
of
the
prefunding
review,
we
didn’t
have
that
many
loan
repurchases
for
it
to
be
super
alerting,”
Suslov
said.
“With
the
little
increase
that
we
had,
it
simply
alerted
us
that
we
need
to
be
more
careful
[in
certain
areas].”

Future
technology

Alan
Qureshi,
managing
partner
of Blue
Water
Financial
Technologies
—
a
technology
solutions
provider
for
the
secondary
mortgage
market
that
also
offers
risk
management
services
—
said
he
holds
out
great
hope
for
the
future
of
tools
such
as
artificial
intelligence
(AI)
and
digital
quality
control
reviews
in
helping
to
level
the
playing
field
in
the
mortgage
market,
including
on
the
loan
repurchase
front.

“Because
of
the
nature
of
buybacks
and
because
of
the
non-standardization
of
loan
delivery,
I
have
a
fundamental
problem
around
counterparty
selection
in
a
market
where
the
big
get
bigger
and
the
small,
well,
they
get
cast
aside,
but
that’s
not
good
for
the
consumer,”
Qureshi
said.

“The
flip
side
is
if
I
instead
have
a
platform
that
leverages
technology
(such
as
AI
and
optical
character
recognition
software,
or
OCR)
to
essentially
level
the
playing
field.
That’s
a
much
better
outcome
and
solution
for
the
industry.”

Verus
Mortgage
Capital is
an
aggregator
and
affiliate
of
asset
manager
and
investment
adviser Invictus
Capital
Partners,
which
sponsors
a
nonagency
securitization
platform.
Verus
has
acquired
more
than
$30
billion
in
residential
loans
and
completed
58
securitizations
since
its
inception, according
to


Dane
Smith,
Verus’
senior
managing
director
and
president.

“There’s
a
lot
of
stakeholders
throughout
the
mortgage
ecosystem,
and
due
diligence
is
kind
of
the
common
thread
that
allows
…
[loan]
documents
[assembled
in
a
PDF
file]
to
be
turned
into
an
institutional-quality
asset,”
Smith
said.

In
a
business
that
is
inherently
high
volume
and
high
stakes,
Smith
also
said
advances
in
technology
—
including
on
the
AI
and
OCR
front
—
promise
to
create
even
greater
efficiencies
and
accuracy
in
the
system
at
all
levels.
He
stresses,
however,
that
the
industry
is
still
a
long
way
from
removing
all
human
touch
and
judgment
from
the
quality
control
process,
which
is
essentially
the
bond
of
trust
holding
the
system
together.

“We
buy
loans
from
over
100
different
mortgage
banks
in
a
given
month,”
Smith
said,
“…
and
we’ve
been
working
with
and
training
a
[generative
AI]
system
on
our
[non-QM]
guidelines.”

He
stressed
that
the
AI
system
is
still
in
development
and
not
in
general
use
at
this
point.

“We’ve
been
training
it
just
so
you
can
ask
a
question,
and
it
can
give
you
the
various
guidelines
in
response,”
Smith
explained.
“So, we’re
much
closer
[to
AI
underwriting
in
the
non-QM
space],
but
I
still
think
there’s
still
a
pretty
decent
ways
to
go before
you
could
upload
all
the
mortgage
docs,
and
it
can
understand
what
type
of
loan
it
is,
or
it
could
understand
and
underwrite
the
loan,
and
it
could
bump
it
up
against
guidelines.

“
…There’s
lots
of
ways
we
can
use
AI
to
increase
productivity.
Unfortunately,
we’re
still
a
ways
from
decisioning
and
underwriting
and
QC.“