Which Five Provisions Decide a Correspondent Master Loan Purchase Agreement?

Five: the order of precedence, the amendment power, the survival clause, the remedies clause, and the forum. Four of the five point away from the agreement you just negotiated and into a document the purchaser controls. In the filed correspondent agreement read for this article, the seller guide outranks the agreement expressly, the purchaser may rewrite that guide in its sole discretion, and delivering a loan after notice counts as your agreement to the rewrite. That is the structural fact worth knowing before you spend a week on the rep schedule.

Which document controls when the agreement and the seller guide disagree?

The seller guide, in the ordinary correspondent form. A filed correspondent purchase and sale agreement between Washington Mutual Bank, FA and Crescent Mortgage Services, Inc., dated 5 March 2003, incorporates the seller guide “by reference in its entirety into this Agreement,” then provides that on any inconsistency between the two “the terms and provisions of the Seller Guide shall control.” A commitment letter controls over both.

Read that order twice. The document the parties negotiated sits at the bottom of a stack of three, under a manual written by one of them and under a trade confirmation issued by the same party. A concession won in the agreement is worth what the guide leaves it.

Who can change the seller guide, and what counts as your agreement to the change?

The purchaser, alone, and delivering a loan can be your agreement.

The same agreement provides that the seller guide “may be amended or supplemented by Purchaser from time to time in Purchaser’s sole and absolute discretion,” and that “[i]f Seller registers, locks or delivers a Mortgage Loan after receiving notice of a proposed amendment, Seller shall be deemed to have agreed to such amendment.” No signature is required and none is contemplated.

So the controlling document is unilaterally amendable, and the act of doing business is the act of consenting. A seller that locks a loan on Tuesday has accepted whatever arrived on Monday. We have written separately on what an aggregator can change in a correspondent seller guide without your consent.

How long do the representations last?

Past funding, past delivery, and past the agreement itself.

The survival provision states that the representations, warranties, covenants, and agreements “shall survive the applicable Funding Date and delivery of the Mortgage Loans to Purchaser and shall not terminate, notwithstanding the termination of the Agreement.” No period is stated.

A seller reading that for the first time usually asks how long the tail runs. The agreement does not answer, so the limitations statute does, which in New York is six years running from the date the representations were made rather than from discovery. The practical consequence is that terminating the relationship ends the flow and not the exposure, and the file you stop looking at is the file that comes back. The negotiation to have is on the representations that decide whether the buyback tail dies at year three or year six.

Is repurchase the end of it, and where does the fight happen?

Usually not, and the agreement will say so if you read past the repurchase paragraph.

The correspondent agreement makes the seller’s default turn on “any misrepresentation or breach of warranty by Seller or the non-fulfillment or non-performance by Seller of any covenant, condition or action required.” What follows is a list, not a ceiling. The seller becomes subject to “any remedies available to Purchaser, including, but not limited to, termination of this Agreement, indemnification of Purchaser by Seller, and Seller’s obligation to repurchase one (1) or more of the Mortgage Loans.” The words sole, exclusive, and only appear nowhere in the agreement in connection with remedies, and a separate provision states that the parties’ rights “are cumulative, may be exercised as often as any party considers appropriate and are in addition to each such party’s rights under any other documents executed between the parties or, except as otherwise modified herein, under law.”

Compare a securitization-side agreement. In the filed mortgage loan purchase agreement between HMB Acceptance Corp. and HomeBanc Corp., dated 1 March 2005, cure, substitution, repurchase, and indemnity “constitute the sole remedies” available to the depositor. One of these two sellers knows what its worst case is. The other does not.

The agencies take the correspondent side of that line. Freddie Mac’s Guide provides that its decision to require or allow a repurchase “in no way diminishes its right to pursue further action such as disqualification, suspension or termination, in whole or in part, of the Servicing Contract and related Servicing Contract Rights.” So the aggregator above you and the agency above it both reserve more than the buyback, which is the pattern to assume in the absence of sole remedy language. There is more on this in what a loan purchaser can do to you besides demand repurchase.

And the fight happens where the agreement says, not where you would choose once it starts. The correspondent agreement commits disputes to “final and binding arbitration before the American Arbitration Association,” with the parties sharing the costs equally and each bearing its own fees. Freddie Mac, by contrast, routes a contested repurchase demand through its own appeal process before any neutral sees it, under Section 3602.4(b) of the Guide.

Neither is better in the abstract. Both are decided in advance, by a provision nobody reads at signing, and both change what a marginal claim is worth.

What should actually be negotiated?

Five things, and the rep schedule is not the first of them.

The order of precedence, so that a term you negotiated survives a guide that says otherwise. The amendment mechanism, so that a material change requires notice and a stated effective date rather than your next lock. A survival period, because a clause that survives termination with no stated end is a tail with no length. An exclusive remedy, or at least a schedule of what else the purchaser reserves. And the forum, including who pays for it.

The provisions that decide it point somewhere else

In a correspondent agreement, the provisions that decide the relationship are the ones that point somewhere else. Negotiate the pointers before you negotiate what they point at, because a win inside the agreement is only as good as the document that outranks it.