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Residential Mortgage Originators Facing Increasing Pressures In the Midst of the Coronavirus Pandemic

Robert M. Siegel

Mortgage loan brokers, correspondents and loan originators ("Originators") who survived (or, in many cases, are still dealing with) the onslaught of "repurchase/indemnification" claims asserted by loan aggregators and government-sponsored entities (GSEs) (collectively, "Investors") following the Great Recession are particularly well acquainted with Investors shifting the risk of a loss to the Originators of mortgage loans ("Mortgage Loans”) originated prior to that period. The Investors sought to attribute the fault for what was clearly a global mortgage market meltdown to the Originators.

Unfortunately, more than a decade later, we face a new global market disturbance, the coronavirus pandemic. Though its ultimate impact on the economy is still to be determined, the pandemic has the potential to wreak havoc on the residential mortgage and homebuilding markets even more than the Great Recession did.

Already, we have started to see signs of Investors seeking to protect themselves from exposure. They have taken steps that include requiring certifications from Originators attesting that borrowers have not requested a forbearance of payments and related matters.

We have also started to hear concerns being raised by lenders of mortgage loan repurchase/line of credit facilities ("Warehouse Facilities"), in the form of such lenders seeking to tighten lending parameters, for instance, minimum FICO scores and maximum loan to value ratios. After the Great Recession, the main "players" in this industry, for the most part, continued to lend to Originators without adjusting their lending criteria in any way that was ruinous to the businesses of the Originators. From a financial perspective, the lack of adjustment by lenders made sense, given the short time periods that such loans are held in the "warehouse," and the reliance on firm takeout commitments or similar arrangements with the Investors that provided the lenders with their source of repayment. Moreover, risky loan products (such as stated income loans) were no longer being originated in the aftermath of the meltdown.

However, the present situation seems markedly different. The current pandemic has affected the global economy more broadly than the Great Recession did. Mortgage Loan borrowers from all areas and across many occupations risk losing their income sources either before or after loan origination. In this type of economic environment, Originators will likely be increasingly pressured by their Investors and mortgage warehouse lenders to tighten their underwriting criteria, possibly to the point where some may feel they no longer can have viable origination businesses. Moreover, a new wave of buyback and indemnification demands is likely.

Sooner rather than later would be a good time for Originators to review the contracts they entered into with their lenders and Investors. No doubt many claims will be asserted that conflict with the actual terms of those contracts. Originators should start from a position of strength by knowing their rights under these contracts.
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