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.
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Provided by:
Esko Kiuru
Mortgage and real estate market commentator
www.BluefoxToday.com - syndicated mortgage and real estate blog
eskokiuru@gmail.com
My cell: 702-499-1006
Esko,
The lendersshould be responsible and they should take back every loan that they issued that was what I call garbage loans. I can't beleive some lenders just won't take responsibility.
Isn't it interesting that **** rolls down hill. First the investors say, "we have all this money. Things are great. Send us more loans because the are doing so well!" So lenders do what is asked. Then things get bad and the investors say "these things are crap, why did you send them to us? Take them back"
Sounds like the American Consumer. "These new SUV's that get 5 gallons/mile are super! I can see over everyone. I can be comfortable. I now pay $100 ever other day to get to my job from the burbs. Take them back!"
Whatever happened to the consumer beware?
oh wait - this is America - land of litigation and home of the whiner!
TGIF!
This would surely raise the barriers to enty into our field, but I would like to see individual loan officers have to carry surety bonds to cover fraudulent loans--bankers and brokers. There is no one better to stop fraud than the person taking the application. The processor is removed from the borrowers as are the underwriters...to far away from the application to really know what is actually going on.
If I write fraudulent loans, then I should be on the hook for them. Fraud would be virtually eliminated if the LO had more skin in the game.
Neal,
If the contract terms were violated, then the loans should be taken back. Otherwise, the borrower has to bear some responsibility, too.
Gene,
Thanks for the invite. It's posted there.
Matthew,
Everyone in the residential real estate business is partly responsible for the current problems, including the large investors and consumers.
Rich,
The mortgage industry does have some weaknesses, like a lack of a national licensing system which is likely to get fixed soon for everyone's benefit.