What are loan repurchases and how can lenders avoid them?

The mortgage industry has seen an increase in loan repurchases throughout 2023, and industry experts fear that the number of loan repurchases may continue to rise. According to HousingWire, independent mortgage banks (IMBs) are heavily affected by loan repurchases, which can be quite costly for lenders. Read on to discover what a loan repurchase is, how they happen, and how lenders can prevent them with improved appraisal review processes.

What is a loan repurchase?

Loans sold to investors must be of a certain quality. Lenders who sell loans to the government-sponsored enterprises (GSEs) ensure that the loans they are selling meet specific underwriting and eligibility requirements.

If and when these loans are found to contain errors such as missing or incomplete documentation, income-related issues, appraisal quality concerns, or others, the GSEs can pursue a loan repurchase request — “repo” for short. The GSEs will require that the selling lender buys the poor quality loans back. This can be costly for lenders, who then must keep these poor quality loans on their books or sell for a lower price to other private investors.

Why do loan repurchases happen on collateral loans?

Loan repurchases sometimes happen when the GSEs perform a review of many loans at once, searching for and identifying risks. The GSEs search for and identify problems with:

  • The appraisal’s condition rating
  • Incorrect form usage
  • Erroneous or unnecessary adjustments
  • Inadequate comparables
  • Lack of required commentary
  • Safety of the property
  • Lack of due diligence on new construction
  • And more

The GSEs send the loans in question back to the lender who are then required to repurchase the loan. The lender then needs to find an alternate strategy for  repurchase agreement , which can be quite costly.

Reviewing an appraisal is complex, making it easy for reviewers to miss the signs of a risky appraisal. Underwriters often perform manual appraisal reviews, which is an arduous process. Appraisals are large documents, and often reviewers must find and use other sources to ensure the review is performed correctly. 

Through seas of documentation, decentralized data, and massive appraisals, collateral underwriting is not only a time-consuming process, but one where it’s incredibly easy to miss something or make a mistake. Thankfully for lenders and underwriters, there’s a better solution.

Reduce loan repurchases with AURA™

AURA™ is Clear Capital’s Appraisal Underwriting Risk Analyzer. This intelligent automated collateral underwriting tool unites the data necessary to tell the full story of an appraisal — helping reviewers quickly identify the issues with an appraisal or approve it. AURA can reduce manual review efforts by 50% or more by centralizing all the data required to quickly and efficiently underwrite an appraisal.

AURA leverages Clear Capital’s more than 20 years of experience and knowledge to understand what matters most for each appraisal review. It aggregates the necessary data to fully analyze appraisal risk and provides users with a summary report to give them a holistic view of an appraisal’s quality. 

AURA also enables lenders to evaluate compliance with Interagency Appraisal and Evaluation Guidelines (IAEG), Uniform Standards of Professional Appraisal Practice (USPAP), and applicable federal and state requirements.

The AURA Summary Report: All the tools you need in one place

The AURA Summary Report compiles the data necessary to perform detailed appraisal review. It aggregates data from Clear Capital’s range of datasets:

  • ClearQC® — Simplify quality control and highlight concerns within an appraisal to focus the reviewer’s efforts and reduce review time. ClearQC runs 100 rules on each appraisal to review the appraisal’s completeness and consistency. It also identifies errors with appraisal photos and sketches, property condition, and more.
  • ClearPhoto™ — This powerful set of AI-driven rules automates photo review by confirming there are no discrepancies between the appraisal data, photos, and sketch. ClearPhoto instantly checks for photo quality and accuracy, reducing time spent identifying photo- and sketch-related errors.
  • Condition Model — AI assesses a property’s condition using appraisal photos and property data, then compares it to the appraiser’s C-rating to flag discrepancies.
  • Bias detection — Risky text detection rules scan for problematic language to ensure an appraisal is aligned with fair lending guidelines.
  • ClearCollateral® scores
    • Valuation Accuracy Score — Understand the risk of over- or under-valuation by comparing the valuation to ClearAVM™, our industry-leading, lending-grade automated valuation model.
    • Valuation Confidence Score — This score indicates Clear Capital’s confidence in a valuation’s accuracy. The more supporting data available for the valuation, the more confidence. 
    • Report Quality Score — Determine the quality of the appraisal via ClearQC’s rules engine. The more rules that fail, the lower the report quality score.
  • Comparables — Analyze the report-supplied comparables with Clear Capital’s ranked comparables to understand the risk of over- or under-valuation by taking the sales comparison approach.

Gain confidence in your appraisal review

Enhance your appraisal review process and harness Clear Capital’s more than 20 years of valuation expertise with AURA. Don’t let repurchase demands hurt your bottom line. Email sales@clearcapital.com, call us at 530-250-2525, or visit clearcapital.com/AURA to get started simplifying and enhancing your appraisal review.

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