BluefoxToday blog : May 2008

 The home loan industry has been dealing with all sorts of problems lately, from a soaring heap of foreclosures to a stagnant real estate market that makes meeting monthly revenue projections difficult. Many companies have been forced to close their doors and a host of others still operating are barely hanging in there. Those record-breaking earnings years of the recent past are long gone. Amid all that distress, now it's forced to battle another challenge.

 And this one comes from the investment community. Investors who bought mortgage securities on the secondary market during the boom years are increasingly seeking to force mortgage lenders and banks to take back loans that have failed. A good many are subprime paper, but there are others, too. When these complicated sales contracts are drafted they normally include all sorts of conditions and if they are not met, then the holder can, for instance, return the loan to the originator. A lot, of course, depends on the wording of the agreement.

 The terms could stipulate that if a loan goes bad within a short time period, like two years, it can be sent back. Or obvious mistakes discovered later on could violate the contract. And fraud is now coming up frequently as a reason the investor wants to jettison the paper. Under the fraud label one of the leading contenders has been the doctored appraisal, this one likely a no-brainer to avid industry observers.  

 Countrywide disclosed in a recent securities filing that it expects these types of claims to reach $935 million as of the end of March, while the number was $365 million at the same time last year. That's a heap of money just for this purpose. Other mortgage lenders are now pushed to shore up their reserves, too, putting more pressure on their bottom lines.  

 A large number of these take-back requests are settled in negotiations, some get done by arbitration and then a decent share winds up in litigation. All the same, these claims use up lenders' resources at a time when they can ill afford it. Hopefully they are taking notes so this kind of meltdown won't happen again.