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Repo Man

©2008 April Smith

Norman Turner, quality control officer for Workman’s  Bank in St. Cloud, Minnesota ** was feeling energized and excited.  Until last week, Norman’s job consisted of reviewing closed loans, recalculating APRs and processing reverification requests.  As origination numbers dwindled, Norman’s future looked bleaker every month.  Then one day recently he read an article about the many acquisitions and takeovers in the banking, mortgage and enterprise industries, and he had a brainstorm.  Last week he arranged to make a presentation to The Bank’s Management Committee. 

“As you know, as long ago as 2002, The Bank had a strategy of purchasing mortgage loans for the returns as well as to build the servicing portfolio.  From 2002 until 2007, we purchased $180 million in mortgages,” Norman’s presentation began.

“In order to earn the highest return possible, we began purchasing sub-prime loans and so-called ‘Alt-A’ loans in 2005.  We believed we could temper the risks by performing due diligence and reviewing every loan we purchased, and we did that.  But, as you know, in 2006 we started to see higher-than-expected delinquencies.  At the time, part of the strategy was to review each delinquent loan and investigate repurchase opportunities.  Our standard Purchase and Sale Agreement provides for repurchase by the seller in the case of fraud or misrepresentation.  In the beginning we had some limited success and a few loans were repurchased,” he continued.

“We felt like the originators who agreed to buy loans back were doing so because they wanted to continue to do business with us.  But, as you know, the number of successful repurchases amounted to just a handful of loans.  Then the sellers started to stonewall us.  We knew that several of them just didn’t have the financial wherewithal to buy loans back anymore and, indeed, some of them had gone out of business.  The remaining lenders no longer worried about selling us loans in the future; they were simply trying to stay alive by that point.”

“Last week I was reading an article about all of the recent mergers and takeovers in both the public and private sectors, and I decided to do a little research.  I’ve come to the conclusion that we should make a renewed effort to demand repurchase on some of our many delinquent purchased loans.  First I’m going to tell you why I feel this way, and then I’m going to tell you how we are going to recapture of millions of dollars.”

At the beginning of the presentation, Norman had looked around the long conference table at polite but neutral faces.  For an instant he said to himself, “What in the world are you doing here?  This will never work.  They’ll think it’s pie in the sky.  And then on top of that, they’ll never listen to you again.”  But now he could see that he had piqued their interest.  A couple of members were even smiling or nodding.  He had them hooked; they just needed to be convinced.

“Here’s an example,” Norman continued.  “We purchased a pool of Alt-A mortgages with balances of  $17 million from GoodBank in August of 2005.  For the most part, these loans had no proof of income.  Following our program, we underwrote every one of the 62 loans in the original package.  We rejected 6 of them.  We purchased the remaining 56 since all of them followed GoodBank’s underwriting procedures.  They were all new production.”

“I’m sure I don’t have to tell any of you that these loans started to go sour a couple of months after we purchased them, and at a rate we had not previously experienced.  We reviewed all of our purchase documents and decided to attempt to get GoodBank to repurchase the delinquent loans.  We looked for any and all reasons for repurchase, including bad appraisals, document errors and underwriting issues.  And you all know the rest of the story.  We submitted 11 demand letters to GoodBank in March of 2006.  Nothing happened.  Two months went by and we had no response, so we had our lawyers send them a letter.”

“Then, in July of 2006, we received a letter from the Senior Vice President of Secondary Marketing at GoodBank.  It basically said they weren’t interested in considering our repurchase requests and that, from their standpoint, the matter was closed.”  Norman knew this was a sore subject with the Management Committee.  He had felt at the time that the thinking was he could have done more and, if he had been cleverer and more demanding, some money could have been recaptured.  But he also knew from talking to his friends and counterparts in the industry that GoodBank not only didn’t repurchase from anybody, they wouldn’t even acknowledge individual repurchase requests.

“Well,” Norman continued, “here’s where it gets good.  As you know, we didn’t do anything further with this pool of loans.  We’ve taken some losses on it that are much larger than anything in our experience, and today loans in the pool continue to go bad at an elevated rate.  You all are aware that this summer GoodBank was taken over by Founders One Bank, one of the 10 largest banks in the US.”  At the mention of Founders One, John could sense renewed interest in the room.

“I was recently reading an article about the details of the takeover and it occurred to me that not only does Founders One have deep pockets, it’s clear they are positioning themselves to be a leader in the mortgage industry --  that is, when the mortgage industry comes back.”  Norman knew that, for the most part, nobody was talking about the mortgage industry coming back, but he sensed they were waiting to see what he would say next.

“We believe it’s in Founders One’s interest to at least consider our repurchase requests.  We have been a player in the past and our balance sheet indicates we’ll be there in the future,” Norman went on to say.  “So we’re proposing a renewed effort to get Founders One to repurchase some of our delinquent loans.  We’ve decided to literally and figuratively tear each loan apart, spending the time, the energy and the money to make the most compelling, effective cases for repurchase that we can.  In addition to reunderwriting, we intend to devote a large amount of Internet research to confirm the present value of the property, analyze compliance at the time the loan was made, and investigate the borrower.”  When he looked around the table, two of the committee members were nodding.

“As you know, we don’t have the staff to accomplish these in-depth and out-of-the-box analyses, as well as to compose and administer the repurchase demands themselves, so we propose to hire an outside firm.  It’s expensive, but we’ve calculated that it can really pay off if we are successful on just a fraction of the delinquent loans.  I have some charts and estimates that I can show you if you like.”  Norman held his breath.  He knew that what would sell the Management Committee would be the philosophy of the concept.

“I have a question.  What happens if you have a bad appraisal and the property value has dropped?”  The speaker was J.T. White, longtime counsel to the Management Committee.

Norman knew he had to play this just right.  “The philosophy we’ve decided on is that we will only use major, provable objective issues.  That way our credibility will stay strong and we’ll have better luck with the demands we do make.  We’re not going to get anywhere with these folks by claiming that Comp 2 is 3 miles away.”

“Sounds like a no-brainer to me.  What have we got to lose?”  White commented.  The others nodded. 

“Well,” Norman replied, “like I said, the whole project pays for itself if we are successful with just a few loans.  Does this mean that we have your approval to go ahead?”  Smiles on all sides of the table, and even a thumbs-up down at the end.

“Norm, you have our approval to go ahead.  Please keep us posted with your progress.  We will expect a detailed report from you at next month’s meeting.”  This from Allen Jacobs, President and CEO.

Norman was excited and energized.  He couldn’t wait to call the consulting company and get started.  He was certain that their efforts would be successful now that Founders One was in the hot seat, and he looked forward to working through the loans, making some money for Workman’s Bank and furthering his career in the process.  It was the first time in months that he felt good about his job.  Maybe he would think about planning that vacation after all.


**The characters and the banks are fictional, as are any transactions or resolutions between any parties, either past or anticipated.