Repurchases Stinging Subprime Mortgage Sector

Buybacks are exacting a toll on subprime lenders — even forcing some out of business, according to coverage from MortgageDaily.com — the dominant source of online news for the mortgage industry.

"There is some renewed focus by the buyers of those loans," the president of Accredited Home Lenders said during a recent conference call.

While its not a crisis, Accredited, which saw its repurchases jump to nearly $52 million in the third quarter, is "managing it aggressively."

In August, H&R Block said all of its business segments performed well except Option One Mortgage Corp., which was impacted by "increases in mortgage loan repurchases." Block lost $131.4 million during the second quarter, according to its earnings release.

But companies like Ownit Mortgage Solutions were unable to manage the problem. Ownit recently shut its doors even as one of its investors, Merrill Lynch, acquired another subprime operation.

Harbourton Mortgage Investment Corp. was forced to cease funding new loans "when it was unable to satisfactorily resolve mortgage repurchase claims."

Mortgage Lenders Network USA abandoned its wholesale business altogether, leaving brokers and their borrowers stranded — though Lehman Brothers Holding Inc. is rumored to be near a deal to fund MLN’s pipeline.

EMC Mortgage Corp. accuses MortgageIT in a lawsuit of owing it $70 million in buybacks for about 587 subprime loans.

But accelerated repurchases aren’t all bad, according to Fitch Ratings. Rather than indicating an acceleration of default trends, the increase in repurchasing activity is a "self-correcting mechanism" and a reality check for mortgage originators, the agency said in a report last year.

Fitch believes secondary market behavior was largely responsible for the unexpected repurchase provisions recognized by some originators. "The increase in repurchase activity appears to be more a result of loan buyers consistently using their right to put loans back to sellers."

In response, "companies are quickly playing catch-up with the changing rules of the game" by tightening underwriting guidelines to prevent repurchase requests, a Fitch director said in a written statement.