The intent of the following article is to provide an overview of mortgage industry loan repurchase and indemnity requirements and demonstrate methods that investors use to track and report seller mortgage loan repurchase and indemnity statistics for risk management and performance monitoring purposes.

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Mortgage Loan Repurchase & Indemnity Overview

In an effort to offer more loan products and remain competitive in today's expanded marketplace both the bank and mortgage brokers participate in correspondent or wholesale lending programs. Correspondent and wholesale lenders refer to the banks and mortgage brokers that sell them loans by many names - Originators, Brokers, Lenders, Sellers or Correspondents. For the purpose of this article the banks and mortgage companies that originate the loans are "Sellers" and the correspondent or wholesale lenders that fund or buy the loan from the seller are "Investors".

Sellers, based on investors' guidelines, make a lending decision and fund the mortgage loan using their own money, the investor's money or a warehouse line of credit. As soon as the loan has closed, it is sold to an investor at a previously negotiated price. This dynamic works great for the borrower. The borrower is dealing with the seller who will close the loan, and the seller is able to shop the mortgage around thereby obtaining the borrower a lower interest rate.

In some instances, which are outlined in a seller agreement between the seller and the investor, a seller may be required to repurchase or indemnify a loan that it has sold to an investor. For the purposes of this article the following repurchase and indemnity definitions are provided:
  • Repurchase - The investor requests due to a defect in the mortgage loan, as outlined in the seller agreement, that the seller repurchase the loan and reimburse any incentives paid to the seller.
  • Indemnity - The investor requests due to a defect in the mortgage loan, as outlined in the seller agreement, that the seller provide an insurance policy to protect the investor in the event of loan default. This insurance policy is commonly referred to as an indemnification or indemnity. Smaller seller organizations will typically chose to pay for an indemnification in lieu of repurchasing the loan from the investor.
The following are some of the more common reasons that an investor will request that a seller repurchase a loan: The "Reporting Seller Mortgage Loan Repurchase & Indemnity Statistics" section of this article details steps for creating a report that an investor might use to track and report repurchase and indemnity statistics for loans that a seller has delivered to the investor. A seller with a high percentage of repurchases and indemnities could warrant a caution or corrective action letter from the investor. Serious repurchase and indemnity issues might warrant a suspension of seller privileges or legal action. The Sample Mortgage Loan Repurchase & Indemnity Report in this article can be used as a model for a stand alone report or incorporated into a comprehensive Seller Scorecard report.

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