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Special Reports
Nonprime Lending
Analysis: Buybacks Unlikely to End Soon
By Paul Muolo
It looks like the tidal wave of loan buyback requests plaguing the nonconforming
sector is showing no signs of slowing down.
According to interviews with investment bankers, due diligence executives, warehousers and others, buyback requests
are still a huge headache for the industry, playing a key role in the pickup of merger activity.
One investment banker, requesting his name not be used, said he has a small deal "that may or may not close
because" of buybacks. He noted, however, that at the same time he has several transactions pending "because
the firm has to sell." Why? Because the originators are so overwhelmed by buybacks they need the money.
Meanwhile, buyback disclosures are becoming commonplace in the earnings reports of publicly traded nonconforming
originators.
New Century Financial Corp., Irvine, Calif., the nation's second largest subprime funder, reported in its third-quarter
earnings statement, "Higher loan repurchases and discounted mortgage loan sales reduced the gain-on-sale margin
by 48 basis points."
Company EVP of secondary marketing, Kevin M. Cloyd noted, "We expect the volume of discounted loan sales and
the severity of the discount to continue to challenge originators in this industry."
He added, "Loan buyers have become more vigilant, increasing the number of loan files reviewed in their due
diligence process and decreasing the percentage of loans they ultimately purchase."
NetBank of Atlanta, which posted a $73 million third-quarter loss last month, noted, "Although repurchase
demands improved from last quarter, they remained at an elevated level."
A company spokesman told Origination News the bank has been hurt by both prime and nonprime buybacks, adding that
most of the trouble comes from mortgages sourced through third-party brokers and correspondents.
Last month, NetBank revealed that it was closing its subprime division. (See related story elsewhere in this publication.)
Even though buybacks spell trouble for lenders, it has created opportunities elsewhere in the industry. Firms that
peddle due diligence and fraud review services report they are overwhelmed by demand.
As for lenders reporting that buybacks are improving, one banker said it could be a façade. "Many of
these companies that say they have resolved their buyback issues really haven't," said the banker. "They've
simply become indentured servants" to their secondary market investors.
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