New Ruling on Mortgage Putbacks a Potential Huge Win for Banks

Yves Smith discusses New Ruling on Mortgage Putbacks a Potential Huge Win for Banks

Even though, for most people, the housing crisis is a thing of the past, the fight over who should bear the cost of sloppy and openly fraudulent mortgage origination and securities sales continues to grind through the courts.

We’ve written now and again about mortgage putback cases, which are also called representation and warranty, or “rep and warranty” litigation. Investors in mortgage-backed securities were not quite as dumb as the crisis aftermath had made them look. The sponsors of the securitizations made promises in the offering documents (called representations and warranties) about the quality of the loans. It turns out they lied.

Normally, when a loan is found to be worse than the sponsors promised, the remedy is a putback. The originator is required to take the bad loan back and replace it, either with cash or buy replacing it with a loan that was of the quality that the investors were promised. However, the mortgage securitizations put hurdles in front of the investors: it took a minimum level of investors (usually 25%) to demand putbacks and it was hard for any investor to know who else had bought a particular deal. Even then, the trustee (who was the party who was responsible for putting back the loan) almost always ignored and fought investor putback requests. They have ongoing relationships with the sponsors, so they don’t want to ruffle big meal tickets, plus the margins for acting as a mortgage securitization trustee are thin, so they don’t lift a finger unless they absolutely have to…