Captives for Mortgage Banking: Can Captives Help Manage Loan Buybacks More Efficiently?
Yes, a Captive Insurance Company provides an elegant and tax efficient tool for profitable mortgage bankers to reserve against the risk of being forced to buy back mortgages due to default or fraud by applicants or brokers.
Let’s go back a few years to to understand why this structure is important.
Following the real estate market downturn in 2008, it became clear that mortgages and mortgage-backed securities had been widely distributed and the validity of many mortgages and documents were without regards to lending standards, income verification and appraisal values.
As delinquency, default and foreclosure rates continued to rise, mortgage investors, including federally backed companies, were left with large portfolios of toxic mortgages. Consequently, mortgage security holders began demanding mortgage buyback’s. Federally backed companies argued that they relied on the mortgage lender to do the complete underwriting and they were funding the loan based on the representation of the mortgage lender. Many lenders subsequently went under due to this liability.
As the real estate market has stabilized, many mortgage bankers have returned to profitability. However, the fear of buyback’s looms large. Without the deep pockets of the large publicly traded banks, forced buyback’s could prove insolvency or non-compliance with warehouse lenders.
Setting up a captive insurance company insures the risks of its owner and affiliated companies. When properly structured, premiums are tax deductible to the company and received tax free by the captive. Mortgage bankers are in a unique position to utilize a captive in a tax efficient manner to better manage their loan buyback liabilities.
Whether you’re looking into the benefits of insurance captives for mortgage banking or wondering if you could benefit from a different type of captive application, take our feasibility assessment by clicking here .