What Is a Mortgage Putback?
Mortgage putback is the forced repurchase of a mortgage by an 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 are misrepresented.
Understanding Mortgage Putback
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 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.
Causes that Lead to Mortgage Putback Claims
Mortgage originators might sell their stake in mortgages to investors in order to reap an immediate payout while the investors would collect payments from the borrowers over the life of the mortgages. What became apparent in the mortgage crisis was that already toxic mortgages and mortgages that were bound to lapse were bundled in with other mortgages that were resold to investors.
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 if a mortgage putback claim is pursued after the discovery of discrepancies or potential fraud, the originator might not have the resources to repay those investors. Their assets might have already been expended as the market fell into crisis. Furthermore, some originators claimed that they were defrauded by the borrowers. If courts rule in favor of such 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 may be denied.
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 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 may necessitate the inclusion of all the mortgages in the bundle when a putback claim is filed.