Rep and Warranty, Servicing Costs Remain Elevated in Q4: KBW

Rep and Warranty, Servicing Costs Remain Elevated in Q4: KBW

BY: ESTHER CHO

Representation and warranty costs remained elevated in the fourth quarter among top originators, though new and outstanding repurchase claims were mixed for large mortgage companies, according to a recent analysis from Keefe, Bruyette & Woods, Inc (KBW).

The GSEs continued to drive much of the new and outstanding repurchase claims, with Fannie Mae repurchases totaling $1.9 billion in Q4, down from $2.02 billion in Q3, while Freddie Mac repurchases totaled $638 million, down from $819 million, the report revealed. The boutique investment firm also noted outstanding repurchase requests for Freddie Mac grew to $3.03 billion from $2.94 billion in Q3.

For Bank of America, rep and warranty loss reserves increased to $19.02 billion from $16.3 billion in Q3, while total outstanding requests increased to $28.3 billion from $25.5 billion.

According to the report, Wells Fargo’s rep and warranty loss reserve rose to $2.21 billion from $2.03 billion in the previous quarter, while GSE requests remained flat.

On the other hand, JPMorgan’s rep and warranty loss reserve shrunk to $2.8 billion from $3.1 billion. At the same time, the bank’s new repurchase requests fell to $818 million from $1.79 billion, while outstanding repurchase demands shrunk to $2.98 billion from $4.12 billion.

KBW analysts expect new claims to stay high and for lenders to continue experiencing elevated levels of rep and warranty provisions over the next year.

However, KBW says the rep and warranty framework introduced in September 2012 from the Federal Housing Finance Administration (FHFA) brought on changes that are positive for the mortgage industry. One change provides rep and warranty relief for loans that are current for 36 months, with a 12-month equivalent for Home Affordable Refinance Program (HARP) loans.

“Underwriting guidelines are very tight currently partly because of uncertainty about GSE rep and warranty risk, and to the extent this risk becomes more transparent, lenders could potentially be more flexible in their underwriting standards,” the firm stated in the report.

KBW analysts also found servicing costs remained elevated in the fourth quarter, noting a number of banks part of the Independent Foreclosure Review (IFR) settlement took on associated costs. A settlement in January replaced the IFR, which stemmed from consent orders issued by federal regulators in April 2011.

For Wells Fargo, the reviews cost the bank $125 million per quarter last year, according to the report.

KBW also provided a snapshot of collective delinquency data.

In January, Fannie Mae’s serious delinquency rate fell 11 basis points to 3.18 percent, while Freddie Mac saw an increase of 5 basis points to 3.20 percent. Meanwhile, data from Lender Process Services showed a decrease in nonperforming loans (delinquencies and foreclosures), which have declined to 5.21 million in January from 5.29 million in December. LPS is releasing February data on Tuesday.

KBW also included data from Mortgage Insurance Companies of America (MICA), which revealed primary insurance cures rose to 20,568 from 20,048, while primary insurance defaults were down to 23,538 from 24,585.

 

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