Thanks to what government-controlled GSE Freddie Mac is calling a “material increase in mortgage insurer rescissions, cancellations and denials of coverage” in its mortgage portfolio, the GSE is warning mortgage sellers and servicers that it may be demanding that they buy back loans if it is determined that the mortgage “does not have the mortgage insurance coverage as required at delivery, or if the mortgage insurance coverage is no longer in force”[1]. Furthermore, lenders who currently have outstanding repurchase requests in place from the GSE “must move ahead with buying back the loan or appeal the repurchase request” via providing proof that the mortgage does have effective insurance or that it has been paid in full. Lenders have until September 30 of this year to resolve repurchase requests made prior to May 31, 2011. However, they are subject to whatever timeline is stated in the request for repurchase requests made after that date.

Mortgage with loan-to-value (LTV) ratios of more than 80 percent must be insured before sale to Freddie Mac[2]. The GSE is concerned that lenders and servicers are not and have not been honoring this requirement and hopes that the public alert will speed repurchase settlements along and deter further errors as well. For example, at the beginning of August, Bank of America was forced to repurchase “many more faulty loans” than it had originally agreed to, potentially jeopardizing cash flow, announced BofA spokespeople[3]. It appears that from the GSE’s standpoint, this transaction was a success since now it appears that many other lenders may have repurchase more toxic mortgages than they had originally planned.

Do you think that this repurchase strategy is good for the lending market? For real estate?

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[1] http://www.dsnews.com/articles/freddie-mac-warns-of-repurchase-demands-for-insurance-deficiencies-2011-08-15

[2] http://www.mortgagedaily.com/FreddieMI081511LP.asp

[3] http://www.boiseweekly.com/CityDesk/archives/2011/08/06/b-of-a-forced-to-buy-back-more-toxic-mortgages