PERSON OF THE WEEK: Loan buybacks spiked in 2022, following the pandemic-fueled housing boom, and remained elevated through most of 2023, causing alarm for many lenders. Many of these buybacks were triggered when loans were audited after they went into COVID-19-related forbearance plans – but there has also been an increase in repurchases stemming from a wide-range of errors in the application process, including miscalculated income, missing documents or even appraisal-related problems. Today, many lenders are deeply concerned that the trend of increased buybacks will persist through 2024 and beyond.
The threat of loan buybacks is particularly troubling for smaller lenders, which have seen their margins stretched thin due to the massive drop off in origination volume that started in early 2023, as interest rates rapidly increased.
To learn more about the concerns surrounding loan buybacks and what lenders can do to lessen the risks, among other topics, MortgageOrb recently interviewed Tracy Huber, director of product management, mortgage services, for Equifax Workforce Solutions.
Q: Why are some lenders concerned about buybacks, and what can they do to lessen the risk?
Huber: The recent increased volume of loan buybacks continues to pose significant challenges for mortgage lenders. The renewed focus and stringent guidelines are a result of concerns GSEs (government sponsored enterprises) have about increased rates and property values pushing borrowers closer to the qualification limits. Lenders face heightened risk and the prospect of added operating costs as they are increasingly forced to repurchase loans with claims of defects.
Lenders are seeing repurchase demands for various reasons, such as miscalculating income evaluations. Many lenders have traditionally attempted to verify applicant income by contacting the applicant’s employer or asking the applicant to provide pay stubs or W-2s.
One way those lenders may better navigate this uptick in buybacks is by adopting more efficient methods of verifying a borrower’s employment and income. Automated data provided directly from employers through a trusted third-party (such as a Day 1 Certainty authorized verification report supplier,) can help increase certainty throughout the decisioning process and reduce the risk of future defaults resulting from errors in manually-provided income.
As an approved data provider of the GSEs data validation programs, verifications from The Work Number may help protect loans from repurchase threat. That’s more important now than ever and may even contribute to strengthening lenders’ portfolios and increasing investor value.
Q: Will student loan repayments have an effect on mortgage lending?
Huber: Student loan debt is a financial reality for many Americans – 43.4 million consumers. In fact It makes up $1.5 trillion out of almost $17 trillion in total outstanding consumer loan debt. Consumers 18-39 years old hold 55% of student loan debt, which can stand in the way of financial freedom. For instance, if a consumer is exploring homeownership, outstanding student loans could prevent them from qualifying for a mortgage, especially given steep housing prices and increased interest rates.
When evaluating home loan applications, lenders assess a borrower’s debt-to-income ratio (DTI), which compares monthly debt payments to monthly income, expressed as a percentage. Although these debt payments and other obligations have always been used in calculating debt-to-income, many consumers are now financially strained as student loan payments are again required. As these payments resume for the first time in three years, personal budgets are increasingly stressed, averaging a jump of 17 percent in monthly debt commitment–24 percent in the case of Gen Z. Even though student loan debt was always factored into consumers’ DTI ratio, the fact is many people were not making monthly loan payments during the moratorium and instead were using those funds for other expenses. Now, those consumers will have to rethink their budgets to include their student loan payments.
The Consumer Financial Protection Bureau (CFPB) found that half of all borrowers whose student loan payments are scheduled to restart have other debts worth at least 10 percent more than before the pandemic. Since affordability is already a massive issue for today’s buyers, adding student loan payments will likely make home buying more difficult for many.
Fortunately, one option works in borrowers’ favor: alternative data, a term that applies to anything outside the traditional credit reporting system. Considering 77 million consumers are excluded from access to credit because of their thin or “invisible” credit files, financial institutions are incentivized to leverage additional forms of data to determine ability-to-pay when underwriting loans.
In other words, employment history, utility payment history and rental payment histories could factor into a lending decision. With the support of alternative data, borrowers who are in the market for a new home, particularly those who are on the cusp of qualifying–even those with student loan debt–now have a better chance to attain financing based on clarity of their overall commitments, payment history across more than just credit, and accurate view of income.
Q: What are the benefits of using an instant and automated method for verifications of income and employment?
Huber: Few parts of the loan origination process are as time-sensitive – or can be as time-consuming–as applicant income and employment verification. The “old school” practice of contacting the applicant’s employer is slow, and depending on the applicant to provide pay stubs and W-2s can be a hassle, thereby creating friction for both the customer and the lender. The applicant must find, access, and then upload, or worse, print and mail documents. This may also open the lender up to risk from misrepresented or even falsified documentation.
To counter this manual process, some lenders may consider consumer credentialed (“permissioned”) options that require consumers to authorize use of their payroll provider login credentials as a way for such lenders to gain access to payroll records. Consumer-permissioned verification also places the verification burden on consumers. If not handled carefully, this can also add risk to the employee, employer, and the payroll provider by introducing a consumer’s payroll login credentials to another party.
Instead, lenders should consider using automated income and employment verification data from trusted sources to help with loan decisioning while better mitigating risk. Using an instant data provider such as The Work Number® to verify income and employment helps ensure lenders have the information to make decisions quickly and safely.