Mortgage Putback What It is How It Works History
Mortgage Putback: What It is, How It Works, History
Ali Hussain has a background in finance and journalism.
Lea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.
What Is a Mortgage Putback?
A mortgage putback (also known as a buyback) is the forced repurchase of a mortgage by a mortgage originator. The loan originator must repurchase the loan from the entity holding the mortgage security, such as an institutional investor. This most often occurs with mortgage-backed securities (MBS).
A mortgage putback is most commonly required due to findings of fraudulent or faulty origination documents, misrepresenting the creditworthiness of the mortgagor or appraised value of the property.
Key Takeaways
– A mortgage putback is the forced repurchase of a mortgage by a mortgage originator from the entity holding the mortgage security.
– It is most commonly required due to findings of fraudulent or faulty origination documents, misrepresenting the creditworthiness of the mortgagor or appraised value of the property.
– Mortgage originators might sell their stake in mortgages to investors.
– By doing so, mortgage originators can reap an immediate payout while investors collect payments from borrowers over the life of the mortgages. This process is known as selling mortgage-backed securities (MBS).
– After the collapse of the American real estate market in 2008, it was found that mortgages and mortgage-backed securities had been widely dispersed throughout the financial system, with questionable validity.
Understanding a Mortgage Putback
A mortgage-backed security (MBS) is an investment similar to a bond that consists of a bundle of home loans bought from banks. These loans are repackaged into one security for investors to purchase. Investors receive periodic payments similar to bond coupon payments, which come from the mortgage payments made by homeowners.
The mortgage originator is the original mortgage lender, who can be a mortgage broker or mortgage banker. They might package several mortgages and sell them to investors to reap an immediate payout, remove the risk of default, and write more mortgage loans. Investors collect payments from borrowers over the life of the loans. This process is known as selling mortgage-backed securities (MBS).
A mortgage putback occurs when an investor believes that one or more underlying mortgages in the MBS have an issue. For example, if a borrower defaults on their loan, the investor’s payment stream could be impacted. If the investor believes that an aspect of the mortgage or package of mortgages was misrepresented, they can demand a mortgage putback. This requires the loan originator to buy back the mortgage, removing the risk for the investor.
History of Mortgage Putbacks
After the collapse of the American real estate market in 2008 and the subsequent financial crises, it was found that mortgages and mortgage-backed securities (MBS) had been widely dispersed throughout the financial system. The validity of many mortgages and documents was questionable regarding lending standards, income verification, and appraisal values.
Toxic mortgages and mortgages bound to lapse were bundled with other mortgage loans and sold to investors as mortgage-backed securities (MBS). When borrowers on these mortgages defaulted, buyers and investors sought information from loan originators about the transactions.
Even when pursuing a mortgage putback claim after discovering discrepancies or potential fraud, originators didn’t always have the resources to repay investors, as their assets might have already been expended.
Furthermore, after the subprime mortgage crisis, some originators claimed they were defrauded by borrowers. In cases where courts ruled in favor of such a defense—where originators provided evidence of acting in good faith and borrowers falsified or misrepresented their assets and ability to repay—the putback claim might be denied.
Many mortgage security holders demanded mortgage putbacks from mortgage originators who hadn’t completed due diligence or blatantly defrauded the industry.
Special Considerations
In addition to the originators, investors might seek restitution with a mortgage putback claim that cites the sponsors of mortgage-backed securities (MBS) for responsibility in representing such a financial vehicle.
If toxic mortgages are bundled with current and up-to-date mortgages, a mortgage putback could include non-delinquent mortgages. Investors may want to separate themselves entirely from the responsible parties, or the structure of the MBS might require the inclusion of all mortgages when a putback claim is filed.
After the 2008-09 housing crisis, lenders became reluctant to issue new mortgage loans. To stimulate the housing market, Freddie Mac and Fannie Mae implemented mortgage buyback rules to increase transparency and boost lending.
What Is the Difference Between a Mortgage and a Mortgage-Backed Security (MBS)?
A mortgage is a loan that a potential homeowner takes out to finance the purchase of a home. Since most homes cost more than an individual can afford in cash, borrowing money from a bank is necessary.
A mortgage-backed security (MBS) is a financial security, similar to a bond, consisting of many different mortgages bundled into one. Investors purchase an MBS as an investment from a bank and receive mortgage payments on those loans as an income stream.
What Is a Mortgage Repurchase?
A mortgage repurchase is the same as a mortgage putback. It happens when investors in a mortgage-backed security (MBS) demand the originator repurchase a mortgage due to perceived approval issues.
What Is a Loan Buyback?
A loan buyback, also known as a debt buyback, occurs when a borrower repays a portion of the loan for less than the promised amount. For instance, a bond issuer with $1,000 par bonds may buy back 80% of the issue for $900 per bond. This is often done as an emergency concession during financial issues to prevent a more severe default.
