Understanding Mortgages – An Overview
A mortgage refers to a loan that is taken on such that an individual can purchase or maintain real estate which may be in the form of a home or land. Under a mortgage agreement, the borrower acquiesces to pay the lender over time in the form of regular payments that are split across a principal and an interest. The real estate under consideration serves as collateral that is used to secure the loan.
In order to be approved for a mortgage, there are several requirements that you must fulfil. Provided you are approved, you may be granted a mortgage that permits you to access the real estate you had your heart set on. That being said, there exist certain scenarios under which a mortgage application that had previously been approved may be redacted. A mortgage putback becomes relevant against this backdrop.
Mortgage Putback – Definition
A mortgage putback is a term used to refer to the forced repurchase of a mortgage that is initiated by the mortgage originator. This entity reclaims the mortgage from the individual currently holding the security that has been mortgaged. A mortgage security in this scenario refers to a mortgage-backed security (or MBS).
The need for a mortgage putback primarily arises in instances of fraudulent findings or in the event that the origination documents are faulty. This could be due to the creditworthiness of the mortgagor being misrepresented or the property’s appraised value being incorrect.
Examining the Scope of a Mortgage Putback
In order to understand the scope of a mortgage putback, consider the role of mortgage-backed security (or MBS). This investment operates in a manner that is similar to a bond in that it is composed of a series of home loans that have been purchased from banks that were responsible for issuing them. These home loans are then repackaged and sold in the form of a single security that investors are entitled to purchase. MBS investors are the recipients of payments which are actually the mortgage payments that homeowners pay towards their loans.
A mortgage originator refers to the primary mortgage lender who could either be a mortgage banker or a mortgage broker. Mortgage originators are entitled to sell their holdings in mortgages to investors and by doing this they can earn an immediate payout. This removes the risk that they would otherwise be exposed to and can clear up their balance sheet such that they can allocate more mortgages. If this is the case, investors can proceed to collect the payments they are owed from the borrowers over the course of their mortgages. The unfolding of this entire process is termed as selling mortgage-backed securities (or MBSs).
A mortgage putback arises in instances of an investor being under the impression that one or more underlying mortgages operating within mortgage-backed security has an issue. This issue is capable of adversely impacting the payment stream for the investor if a borrower happens to default on their loan. If the investor is under the impression that a portion of the mortgage has been misrepresented and that there will be adverse repercussions felt by them, they may set in motion a mortgage putback. This scenario would require the originator of the loan to repurchase the mortgage and remove the risks that the investor might otherwise expose themselves to.
Examining the Historical Past of Mortgage Putbacks
2008 witnessed the American real estate market crash followed by a series of financial crises. Tethered to these crises were mortgages and mortgage-backed securities (or MBSs) that had been spread across the financial system. However, the validity of a large chunk of the mortgages and documents considered were questionable in terms of the lending standards applicable, the extent to which the income had been verified and the appraisal values that had been listed.
A number of mortgage security holders demanded that mortgage originators apply mortgage putbacks in the event that they hadn’t done their due diligence or had committed frauds outright. Mortgages that were toxic as well as those that were likely to lapse were grouped together with other mortgages and resold to investors in the form of MBSs. When the borrowers who held such mortgages began to miss their payments or defaulted, buyers and investors who held those mortgages began to seek out information pertaining to the loan originators to understand the transactions more deeply.
Even in instances when a mortgage putback claim was followed up on once discrepancies or potential fraud were discovered, originators didn’t always have the resources needed to reimburse investors as their assets may have already been expended.
Moreover, following the subprime mortgage crisis, some originators began to claim that they were defrauded by borrowers. In scenarios such as these where the courts deemed that the originators acted in good faith while the borrowers falsified information, the putback claims were denied.
Lessons Learned
After having acquainted yourself with mortgage putbacks as well as the crises that transpired in 2008 following the misuse of mortgage-backed securities, you must recognise the importance of due diligence. Moreover, you must understand the importance of investing only the money that you can afford to lose. Overextending yourself can prove to have major repercussions.
