Why Did the Foreclosure Fiasco Lead to a Put-Back Panic?
There's a lot of confusion about why fears of put-back exposure at some of our largest banks seemed to spring up so quickly following the revelations about problems in foreclosure proceedings.
Conceptually, these are two different problems. Banks using robo-signers who were fraudulently claiming to have reviewed loan documents has no necessary connection to the idea that purchasers of mortgage-backed securities may have the right to force banks to buy them back.
But the two problems were linked by a common thread: concern that the fraudulent foreclosure practices were a cover-up for a deeper problem in identifying and documenting the ownership of many mortgages.
The concern is that the reason loan officers weren't really reviewing the loan documents is that they didn't have them.
Why wouldn't banks have the loan documents? In some case the notes were destroyed. In many more cases— some say this applies to the majority of home loans made during the housing bubble— the documents just never got properly transferred from the loan originator to the buyer in the secondary market. Yves Smith at Naked Capitalism has argued that every single Countrywide mortgage note is still with Countrywide, even though 96% of the loans were sold into mortgage-backed securities.
The terms of the pooling and servicing agreements that govern almost all private label mortgage-backed securities require the proper assignment of the mortgage notes to a trustee. If the trustee wasn't assigned the mortgage note, the purchasers of the bonds may be able to claim that the mortgages were ineligible to be in the securitization pool and force banks to buy them bank. If enough of the mortgages are flawed, purchasers may have the right to put back the entirety of the bond to the bank that securitized it.
So that was how we got from the foreclosure fiasco to the put-back panic. Now, of course, we've discovered that there are many more sources of put back liability than just missing assignments. But those missing assignments are what got the ball rolling.
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