Mortgage Putback

Mortgage Putback

A mortgage putback is the forced repurchase of a mortgage by a mortgage originator from the entity currently holding the mortgage security, such as an institutional investor. Mortgage originators might sell their stake in mortgages to investors; by doing so, the mortgage originators can reap an immediate payout, while the investors collect the payments from the borrowers over the life of the mortgages; this process is known as selling mortgage-backed securities (MBS). Following the collapse of the American real estate market in 2008 — and the subsequent financial crises that followed — it was found that mortgages and mortgage-backed securities had been widely dispersed throughout the financial system and that the validity of many mortgages and documents was questionable. A mortgage-backed security (MBS) is an investment similar to a bond that is made up of a bundle of home loans bought from the banks that issued them. An investor will purchase an MBS as an investment like they would a bond or stock, from a bank and will receive the mortgage payments on those loans as an income stream; the return on their investment. A mortgage repurchase is the same as a mortgage putback; when the investors in a mortgage-back security (MBS) demand that the originator of a mortgage repurchase that mortgage due to perceived issues related to when the mortgage was approved by the bank. A mortgage putback is the forced repurchase of a mortgage by a mortgage originator from the entity currently holding the mortgage security, such as an institutional investor. A mortgage putback is the forced repurchase of a mortgage by a mortgage originator from the entity currently holding the mortgage security.

A mortgage putback is the forced repurchase of a mortgage by a mortgage originator from the entity currently holding the mortgage security.

What Is a Mortgage Putback?

A mortgage putback is the forced repurchase of a mortgage by a mortgage originator from the entity currently holding the mortgage security, such as an institutional investor. A mortgage security in this instance is a mortgage-backed security (MBS).

A mortgage putback is most commonly required due to findings of fraudulent or faulty origination documents in which the creditworthiness of the mortgagor or the appraised value of the property was misrepresented.

A mortgage putback is the forced repurchase of a mortgage by a mortgage originator from the entity currently holding the mortgage security.
A mortgage putback is most commonly required due to findings of fraudulent or faulty origination documents in which the creditworthiness of the mortgagor or appraised value of the property was misrepresented.
Mortgage originators might sell their stake in mortgages to investors; by doing so, the mortgage originators can reap an immediate payout, while the investors collect the payments from the borrowers over the life of the mortgages; this process is known as selling mortgage-backed securities (MBS).
Following the collapse of the American real estate market in 2008 — and the subsequent financial crises that followed — it was found that mortgages and mortgage-backed securities had been widely dispersed throughout the financial system and that the validity of many mortgages and documents was questionable.

Understanding a Mortgage Putback

A mortgage-backed security (MBS) is an investment similar to a bond that is made up of a bundle of home loans bought from the banks that issued them. The home loans are repackaged into one security for investors to purchase. Investors in MBS receive periodic payments similar to bond coupon payments. The payments that an investor receives from an MBS are the mortgage payments that the homeowners pay on their loans.

The mortgage originator is the original mortgage lender; it can be either a mortgage broker or a mortgage banker. Mortgage originators might sell their stake in mortgages to investors; by doing so, the mortgage originators can reap an immediate payout, remove risk, and free their balance sheet to make more mortgages, while the investors collect the payments from the borrowers over the life of the mortgages. 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. This issue could impact the payment stream for the investor, for example, if the borrower defaults on their loan. The investor believes that an aspect of the mortgage was misrepresented, and, therefore, they will be adversely impacted, and demand a mortgage putback, requiring the originator of the loan to buy back the mortgage, removing the risk for the investor.

History of Mortgage Putbacks

Following the collapse of the American real estate market in 2008 — and the subsequent financial crises that followed — it was found that mortgages and mortgage-backed securities (MBS) had been widely dispersed throughout the financial system and that the validity of many mortgages and documents were questionable with regards to lending standards, income verification, and appraisal values.

Many mortgage security holders demanded mortgage putbacks by mortgage originators who had not completed their due diligence, or in some cases had blatantly defrauded the industry.

Already-toxic mortgages and mortgages that were bound to lapse were bundled in with other mortgages that were resold to investors as mortgage-backed securities (MBS). When borrowers on such mortgages missed payments or went into default, buyers and investors in those mortgages sought information from the loan originators about the transactions.

Even when a mortgage putback claim was pursued after the discovery of discrepancies or potential fraud, the originator didn't always have the resources to repay those investors because their assets might have already been expended.

Furthermore, after the subprime mortgage crisis, some originators claimed that they were defrauded by the borrowers. In instances where courts ruled in favor of such a defense — where the originator gives evidence that they acted in good faith and the borrower falsified or misrepresented their assets and ability to repay the mortgage — the putback claim might be denied.

Special Considerations

In addition to the originators of the mortgages, an investor 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 mortgages that are current and up-to-date on payments, a mortgage putback could actually include non-delinquent mortgages. The investors may want to separate themselves entirely from the responsible parties or the structure of the mortgage-backed security (MBS) may necessitate the inclusion of all the mortgages in the bundle when a putback claim is filed.

What Is the Difference Between a Mortgage and a Mortgage-Backed Security (MBS)?

A mortgage is a loan that a potential homeowner takes out in order to finance the purchase of a home. Most homes cost more than an individual can afford in cash. In order to purchase the home, an individual will need to borrow money from a bank. The money borrowed is a mortgage.

A mortgage-backed security (MBS) is a financial security, like a bond, that consists of many different mortgages bundled into one financial security. An investor will purchase an MBS as an investment like they would a bond or stock, from a bank and will receive the mortgage payments on those loans as an income stream; the return on their investment.

What Is a Mortgage Repurchase?

A mortgage repurchase is the same as a mortgage putback; when the investors in a mortgage-back security (MBS) demand that the originator of a mortgage repurchase that mortgage due to perceived issues related to when the mortgage was approved by the bank.

Related terms:

Creditworthiness

Creditworthiness is how a lender determines that you will default on your debt obligations or how worthy you are to receive new credit. read more

Fallout Risk

Fallout risk is the risk to a mortgage lender that an individual borrower backs out of a loan prior to closing. read more

Federal Housing Administration (FHA) Loan

A Federal Housing Administration (FHA) loan is a mortgage insured by the FHA that is designed for home borrowers. read more

Guarantee Fees

Guarantee fees are the basis points paid by banks to providers of mortgage-backed securities for services and insurance. read more

Mortgage-Backed Security (MBS)

A mortgage-backed security (MBS) is an investment similar to a bond that consists of a bundle of home loans bought from the banks that issued them. read more

Mortgage Originator

A mortgage originator is an institution or individual that works with a borrower to complete a mortgage transaction. read more

Net Interest Margin Securities (NIMS)

A net interest margin security (NIMS) is a security that allows holders to access excess cash flows from securitized mortgage loan pools. read more

Original Face

Original face is the total outstanding balance of a mortgage-backed security (MBS) at the time it is issued. read more

Origination

Origination is the process of creating a home loan or mortgage. It involves numerous steps and participants, and you can't get a mortgage without it. read more

Principal Only Strips (PO Strips)

Principal only strips (PO strips) are the portion of a stripped mortgage backed security that benefits when the underlying mortgages in the pool are paid down faster. read more