For independent mortgage banks, loan sales are only part of the story. Even after a loan is sold into the secondary market, lenders remain responsible for the representations and warranties made to investors. When issues arise, whether through defects, early payment defaults, early payoffs, premium recapture events, or other contractual triggers, the financial impact can return to the lender in the form of repurchase requests, indemnification payments, or premium refunds.
The challenge for leadership teams is not simply understanding the exposure; it’s understanding whether that exposure is being measured and reported appropriately.
U.S. GAAP requires lenders to evaluate potential losses on previously sold loans when a liability is probable and reasonably estimable. Yet determining the appropriate reserve often involves significant judgment, particularly in areas such as EPO and EPD classifications, Ginnie Mae pool repurchases, and identifying which costs belong in the estimate.
Our latest article explores the accounting and operational considerations mortgage executives should understand when evaluating repurchase and indemnification reserves and the common areas where reserve methodologies can fall short. Gain practical insights into reserve methodologies, risk drivers, and reporting considerations that can help strengthen financial reporting and support informed decision-making.
If your reserve process has not been reviewed recently or if any of the issues covered sound familiar, contact us at info@richeymay.com.
