What Is a Mortgage Putback?
A mortgage putback (also known as a buyback) 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.
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.
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.
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.
In the years following the 2008-09 housing crisis, lenders became reluctant to issue new mortgage loans. In an effort to loosen lending standards and stimulate the housing market, Freddie Mac and Fannie Mae announced a series of 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 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.
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 when the borrower is dealing with financial issues and the lenders become worried that there might be a more severe default.