How to Protect Your Portfolio From Freddie Mac’s Mortgage Loan Buybacks

Have you heard the news? Mortgage buybacks are on the rise. Freddie Mac’s 2024 mortgage repurchase requests spiked 29.1% from Q1 to Q2, bringing them up to $430 million.

While loan buyback requests are never welcomed, they’re particularly damaging in today’s market. In the face of high mortgage rates and housing affordability hurdles, loan volumes fell to their lowest level since 2000 this year. With fewer loan originations, buybacks are cutting into lenders’ already slim profit margins. Small lenders, in particular, may not have the financial resources to weather these setbacks.

So, how can you protect your portfolio from unexpected repurchase demands?

As the saying goes, prevention is better than the cure. By employing strategic prevention strategies early on, you can protect your portfolio going forward. Below, we’ll explain the costly consequences of buybacks and how to avoid them.

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The Steep Costs of Mortgage Loan Buybacks

When loan applications are few and far between, it can be tempting to cut corners for your on-the-cusp applicants, particularly those who are desperate to get into homes. Unfortunately, overlooking disqualifying data can have serious financial repercussions for your mortgage lending business.

When you sell a loan to Fannie Mae, Freddie Mac, or other secondary market investors, they can require you to repurchase it if it fails to satisfy their stringent guidelines. The GSEs are entitled to request buybacks on loans for up to 36 months after origination. If mortgage fraud is present, this timeline is even longer.

Income misrepresentation is currently the leading cause of GSE repurchase requests. Other common reasons include:

Documentation issues, including missing, incomplete, or non-compliant information.
Underwriting errors, from debt-to-income (DTI) errors to creditworthiness miscalculations.
Performance concerns, such as early defaults or delinquencies.
Asset misrepresentations, including overstating or fabricating assets.
Inaccurate property valuations, leading to inflated property appraisals or appraisal fraud.
Occupancy fraud, which takes place when applicants falsely claim an investment property as their primary residence.
Employment misrepresentations, including inaccurate or fraudulent employment verifications.
Title and lien issues, such as improper title transfers, unresolved liens, or title defects.
Inaccurate loan-to-value (LTV) ratios caused by improper down payment or home equity calculations.

No matter the cause, loan buybacks can result in substantial financial damage to your mortgage lending business. In addition to buying back the loan, you’ll also incur the associated legal fees, administrative burdens, and reputational damage among secondary market investors.

In recent years, buyback demands have only become increasingly expensive. The average back-end loss on a loan repurchase is currently 30% of the loan amount, which often surpasses $100,000 on standard loans and $300,000 on high-cost loans.

How to Prevent Mortgage Loan Buybacks

The best way to avoid buybacks and their costly repercussions is to ensure the quality of every loan you originate. Luckily, you can do so with ease by leveraging the right tools.

Here are seven solutions from Certified Credit that can strengthen your loan quality while streamlining your workflows and lowering your operating costs:

#1 Cascade Verification of Income and Employment (VOE)

Since inaccurate income is the leading driver of buyback requests, properly verifying it should be your top priority. You can do so efficiently and cost-effectively with Cascade VOE.

Using its advanced rules-based engine, this automated solution allows you to customize a list of instant hit and consumer permission data (CPD) vendors. After that, it requests verifications from them one by one until it receives a hit. To use Cascade VOE, all you have to do is:

Arrange your favorite vendors in your preferred order.
Order your automated VOE to initiate the verification process.
Track your VOE’s status from your POS/LOS or wait for Cascade VOE to alert you via email or text when the process is complete.

Thanks to its advanced automation, Cascade VOE takes the hassle and human error out of your verification process. As a result, it can ensure top-notch loan quality, expedite your lending timeline, and eliminate the need to track multiple vendors from different platforms.

#2 Verification of Assets

After verifying applicants’ income and employment, the next step is to validate their assets. At Certified Credit, we have a tech-savvy solution for this, too. Our digital Verification of Assets removes the need for cumbersome paperwork by confirming your borrowers’ deposit, retirement, and brokerage accounts digitally instead.

Like Cascade VOE, this automated solution provides swift results. You can verify your applicants in real time. It’s also a part of Fannie Mae’s Day One Certainty Compliance program, so it effortlessly satisfies secondary market guidelines.

#3 Cascade Undisclosed Debt Monitoring (UDM)

After approving an applicant, it’s easy to assume that you’re in the clear. Unfortunately, this isn’t always the case. Many borrowers incur debt after their initial approval, which can push their debt-to-income ratio (DTI) past GSE-approved limits. If you don’t address applicants’ undisclosed debt promptly, you can put their loan at risk for fallout or a repurchase request.

Fortunately, you don’t need to wait until closing to find out if your borrower has maintained their loan eligibility. With Cascade UDM, you can monitor your applicants’ credit activity at every stage, from the initial credit check through closing. Cascade UDM will notify you right away via email or LOS if it uncovers any red flags that require your attention, such as:

New tradelines
New credit inquiries
New late payments
DTI changes
Payment amount changes
New collection items

You’ll also receive daily summary reports, enabling you to identify potential issues at a glance and focus on the most pressing credit files first. By providing this valuable blindspot protection, Cascade UDM can strengthen your LQI compliance and enhance investors’ confidence in your loan quality.

#4 Credit Refresh Reports

Another way to ensure your applicants qualify for their loans at the time of closing is to pull a Refresh Report. This type of soft pull credit report can highlight potential closing issues, including:

New credit inquiries
New tradelines
Missed or late payments

When pulled within ten days of closing, our LQI-compliant Credit Refresh Report satisfies Fannie Mae and Freddie Mac’s pre-closing credit check requirements. In turn, it can help you meet secondary market standards with confidence.

#5 4506-C Tax Transcripts

Mortgage fraud often involves identity theft and document falsification. For example, some fraudsters may steal another person’s identity and submit their stolen pay stubs, tax returns, or W-2s during the application process.

Fortunately, this type of fraud is easy to detect with our 4506-C Tax Transcripts. Leveraging a secure connection to the IRS database, these cutting-edge tax transcripts can confirm that your applicants’ stated income aligns with official IRS records. It can also safeguard the long-term health of your portfolio by strengthening the quality control of your funded loans.

Our 4506-C Tax Transcripts are fast and comprehensive. They can quickly pinpoint any discrepancies between your applicants’ information and their IRS-verified income. Best of all, you can access these transcripts conveniently within our cutting-edge platform.

#6 SSA-89 Verifications

Similar to our 4506-C Tax Transcripts, our SSA-89 Verifications use a direct connection to the Social Security Administration (SSA) to provide instant Social Security number (SSN) verifications. After submitting a request, this solution compares your applicants’ stated SSN to the SSA’s robust database, which includes over:

150 million households
200 million consumers
25 million businesses

Ordering our SSA-89 verifications is easy, thanks to our custom API integration. You can connect this solution with your existing LOS and integrate it into your e-signature or wet signature ordering process with ease.

By verifying applications SSNs early on in your lending process, you can prevent mortgage fraud and increase your adherence to secondary market standards.

#7 Liens and Judgments Report

Since 2017, the majority of liens and judgments have been excluded from credit reports. However, you should still consider these factors when assessing applicants’ creditworthiness. After all, consumers with a lien or judgment against them are twice as likely to default on their mortgages.

You can safeguard your portfolio with the help of our comprehensive Liens and Judgments Report. It offers the most up-to-date information about your applicants’:

Bankruptcy filings
Tax liens
Collections
Judgments

Along with helping you make sounder lending decisions, this solution can enhance your FCRA, GSE, and secondary market compliance.Proactively Prevent Mortgage Loan Buybacks With Certified Credit

In a competitive market with limited loan volume, you need to get your compliance right from the start. Doing so can protect the health of your portfolio and subsequent profitability.

The good news? Ensuring the quality of your loans has never been easier. With Certified Credit’s automated solutions, third-party verifications, and robust fraud and risk support, you can enhance your risk management and safeguard your portfolio. Along with the seven solutions we discussed above, we also offer: