Bakerjian Insurance Services (BIS) has launched of a new insurance product designed to protect lenders against potential damage from repurchase demands. Called Lenders Misrepresentation Insurance (LMI), the policy compensates the lender if the loan is put back by their investor because of material financial misrepresentation in the borrower’s loan file.
“Lenders are vulnerable to even a single repurchase demand, especially in today’s mortgage market,” said Stephen Bakerjian, president and CEO of BIS and the originator of the program.
Mortgage fraud just increases this repurchase exposure. The LMI program, which was developed in consultation with key industry participants, is a straightforward insurance solution that transfers the risk. “Loan loss reserves provide dollar-for-dollar protection and you retain the risk,” explained Bakerjian, “but LMI provides a ‘multiplier of protection’ for every dollar of premium and the risk is transferred to the insurance carrier.”
This provides a number of advantages as a risk management tool. “Reserving for losses not only reduces funds available for additional lending,” Bakerjian said, “but worse, those reserves could be treated as retained earnings on the lender’s balance sheet, which could have negative tax consequences. With LMI, you can get better protection for a lower cash outlay, and the premium is treated as an expense, so it’s tax deductible.”
While some in the industry still think mortgage fraud is a non-issue, Bakerjian cited evidence to the contrary. “Mortgage fraud has spawned an entire industry within our industry,” he said. “We have fraud conferences and fraud alerts and fraud predictive analytics. The fact is, mortgage fraud is real, it’s a big deal, and it’s here to stay. It’s also gotten more insidious as fraudsters have gotten more sophisticated. That’s why you can’t totally eliminate it, you can only protect against it.”
Bakerjian says predictive analytics and fraud detection and prevention tools are like seat belts and air bags and automatic braking systems in our cars. “We have all these systems that protect us, but thousands of fatal accidents still happen every year. That’s because you can’t underwrite or predict away all risk — you can’t eliminate bad behavior by the other guy.”
LMI serves as an additional layer that can protect a lender against catastrophic loss. “If you’re a small lender,” said Bakerjian, “just one repurchase demand could damage your finances, your reputation, or even your business. But even a large lender has exposure. Beyond the financial costs, the administrative overhead and reputational risk could also be significant. Your relationship with your investor is valuable and it can be tarnished by having to deal with repurchase issues.”
Source: Bakerjian Insurance Services
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