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A mortgage put-back occurs when an entity, usually a mortgage lender like a bank, is forced to buy back a mortgage that it had sold to a third party as an investment security. This happens because the lender has failed to meet certain specifications regarding the original loan. As a result, the third-party buyer is often stuck with a useless investment vehicle, since the chances of the original mortgage loan being paid back are slim. Lenders can avoid the possibility of a mortgage put-back by following proper lending guidelines and making sure that the borrowers are reliable enough to pay back the original loan.
Mortgages are given by banks and other institutional lenders as loans to homeowners, who pay back the cost of the loan in installments and interest payments until the home in question is paid off. Banks and other lenders often resell these mortgage loans, usually packaged together, as investment securities in the secondary market. Should the homeowner default on mortgage payments, the burden suddenly falls on the investor that purchased the mortgage from the lender. Such a situation often necessitates a mortgage put-back from a lender.
When a mortgage put-back is ordered, it is usually by some regulatory body that devotes itself to investment securities. If this regulatory body finds that lenders have been involved in deceptive practices regarding home loans and then sold these loans off to other investors, it may decide that a put-back is warranted. In this case, the lender reassumes responsibility for the loan.
It is important to note that a mortgage put-back may only be in the offing if the lender was proven to act in a manner that failed to live up to industry standards. All investments have risks involved, and an investor cannot demand a put-back simply because an investment in secondary market mortgages doesn't live up to expectations. In addition, if there is a chance that the loan may still be recovered, even partially, investors might not be able to get the full value of the mortgage in a put-back.
Mortgage lenders who are forced to repurchase mortgages in a mortgage put-back generally have either been negligent or even unscrupulous in their dealings. For instance, lenders forced to make a put-back might have been found to have lied on house appraisals. They may also have preyed on poorer members of society with high-interest loans that the borrowers couldn't possibly pay back. Whatever the circumstance, a put-back can cause significant damage to a lending bank, which in turn can harm the economy at large.