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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 38 May 2023 F E A T U R E BRACE FOR THIS TRIFECTA OF RISK Why zero repurchase risk is only the result of the new normal. B y E . T H O M A S B O O K E R I I I C urrent market sentiment is that repurchase risk is increasing because Fannie Mae and Freddie Mac, for various reasons, are taking a closer look at loan underwriting. This is why mortgage industry participants are concerned about whether their tech is robust enough to reduce buybacks. However, the issue is more nuanced than this shift in the market, and I will explain why. Repurchase risk is the result of the lack of documented precision when home loans are manufactured. The key to success that in- dependent mortgage banks are searching for is about having a scalable platform that will handle high- and low-volume scenarios with the same effectiveness and efficiency. A recent 2023 RMBS (residential mortgage- backed securities) outlook from Kroll Bond Ratings Agency shows issuance for this year to be down across the board. "Expectations for FY 2023 are at $61 billion overall (down 40% YoY), with nonprime at approximately $30 billion (down 30% YoY), prime at $14 billion (down 57% YoY), and CRT (credit risk transfer) $18 billion (down 25% YoY)," the analysts write. In the conforming markets, total originations are forecasted to be $1.8 trillion vs. $2.225 tril- lion in 2022. Volumes are down but there are a large number of loans being made. With market volumes so low, from pur- chase mortgages up to RMBS, independent mortgage banks (IMB) are facing more than repurchase risk, they are facing the following trifecta of risk: » Increasing market complexity (higher costs + low volume = less profit) » Investor expectation for greater preci- sion (zero buybacks) » Macroeconomic volatility that is reflected in the 10-year and its wide movements daily (mortgage rate un- predictability) My take: without a systems solution, there is no dependable way to manage the strategic challenges of the mortgage business at scale. The fear is not the fear of the GSEs or the scrutiny of correspondent, or the 100% review rates of non-QM investors. It is a fear of the increasing expectations of consistent quality, the demand for uniformity, and the intoler- ance for error that leaves loans unsalable to non-GSE Investors (jumbo, aggregators, non-QM) but subject to repurchase at a later date by GSE investors. Achieving near-zero defects is the key to making this contingent liability dynamic manageable. We are at an inflection point. The inflec- tion point occurs when there is a greater impetus for the originator to produce with great precision than there is for the investor in the loans originated. The originator can no longer make money producing at the current cost, and one of the leading indicators of high levels of imprecision in production environ- ments is high cost. Concerns about salability that manifest in longer dwell times or longer cycle times indicate ambiguity in the require- ments necessary to close the loan Increasing market complexity rears its head in the guidelines for manufactured housing loans, the use of down payment as- sistance varying by investor, and the variance in the way non-QM programs calculate free cash flow, for example. I chose managing underwriting guidelines to acknowledge the need for independent mortgage bankers to have the greatest opportunity to originate nearly any borrower circumstance presented. Absent an underwriting platform that will manage the guidelines into underwritten loans as the method for reducing defect or er- ror while increasing throughput, the IMB at scale will not harness enough of the efficien- cies to become a differentiated competitor. Managing underwriting guidelines through E . T H O M A S B O O K E R I I I is the Chief Strategy Officer for Candor Technology. "Books" most recently served as a Managing Director at The Collingwood Group. Prior to joining Collingwood, Booker oversaw the marketing, development, policy, and solution delivery functions associated with the GSEs for CoreLogic. Additionally, Booker served as an executive at Fannie Mae and a General Manager at the IBM Company during his career.