Our comments this week (here and here), along with occasional TBP contributor Mark Hanson, were picked up in Barron’s this morning.

Note that Hanson observes that home-owers are seizing on “loan warranties” and putting their mortgages back to the lenders:

“Ugly weather probably was a drag in January, but even in the months when the sun was shining, home sales haven’t been setting the world on fire. And the dismal demand for both new and existing dwellings came in the face of hefty tax incentives for first-time buyers and other ameliorative efforts by Washington. The latest brilliant idea of Tim Geithner and his henchmen at the Treasury, of imposing a temporary freeze on foreclosures, seems ideally designed to wreak more havoc in housing.As Barry Ritholtz of Fusion IQ reminds us, the profound problems that beset the industry spring from the fact that over the past decade, something like five million to 10 million people bought dwellings they couldn’t afford and still can’t, and a heap of those homes today are worth less, often a whole lot less, than they paid for them.

The Treasury’s proposal, he scoffs, will achieve nothing more than keeping those unfortunate folks in homes they can’t afford, many underwater and burdened by payments they can’t make.

Such mortgages were riddled, not infrequently, with the connivance or encouragement of the lenders — says Mark Hanson, the insightful real-estate analyst who runs the eponymous Hanson Advisors — with fraud, white lies and like nasty stuff that violate the loan warranties. Investors, he relates, are only beginning to seize on such breaches to demand so-called put-backs — repurchases of principal, accrued interest and expenses for loans that have been compromised.

Mark warns that as more investors turn to put-backs to recoup losses, this process will begin to take a toll on financial institutions that were active in the mortgage and housing arena. He points out that because the put-back push is in its infancy, there is no way for financial institutions to estimate future losses or need to recognize the potential costs under current accounting requirements. All of which is apt to make losses that much more painful for those institutions.

Obviously, for investors, home builders and distressed homeowners, the pain inflicted by limp housing, to paraphrase that eminent philosopher, Yogi Berra, won’t be over until it’s over. And until it is, we have trouble envisioning anything resembling a robust rebound by the economy.

Good stuff !


Here Come the Put-Backs
Barron’s MARCH 1, 2010

Category: Credit, Media, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “Here Come the Put-Backs !”

  1. torrie-amos says:

    can somene explain a “put-back”, wasn’t aware of such things, overall though doubt if anyone really knows

  2. I’ll ask Mark Hanson for the full “Put Back” piece to post next week . . .

  3. Chief Tomahawk says:

    Fear not! There’s always ‘WorldCom’ accounting practices & principles to fall back on: shift liabilities over to assets and bingo! Time for more bonuses!

  4. Chz says:

    I had the same question and did a quick search and found several links that provided basic info.


    “Mortgage Putbacks Are Back, with GSEs Doing the Putting
    American Banker
    By Harry Terris
    November 12, 2008

    Mortgage originators are facing a new wave of forced loan repurchases as the government-sponsored enterprises step up reviews for underwriting problems. The current wave differs in several respects from the one that drove numerous mortgage companies out of business in late 2006 and 2007. Back then, the requests came largely from private investors like Wall Street firms, and they were triggered mainly by defaults that occured within a few months of the loan closing.

    The new loan putbacks are coming from Fannie Mae and Freddie Mac, which generally have more power to return loans than private investors. And though mounting delinquencies are driving the GSEs’ reviews, the loans being sent back are often several years old, and not all of them are delinquent. Some lenders have claimed that the GSEs have gone too far, pushing back loans for minor oversights that are not relevant to credit performance.”

    I guess this is another way to spread the loan-loss pain back down the food chain, but don’t understand the bigger picture here, like what companies (originators of the source loans) would be most effected.

  5. rktbrkr says:

    As taxpayers we better pray that the GSEs are successful with their putbacks – although the treasury still has that 300B guarantee to CITI.

  6. rktbrkr says:

    OK so how many irons are in the mortgage fire?
    1) Banks are sitting on huge numbers of shadow foreclosed properties (LA Times-Analysts also estimate that there is a “shadow inventory” of 1.7 million to 7 million homes in foreclosure that lenders haven’t yet put up for sale.)
    2)Banks are short stopping the foreclosure process and allowing homeowers to stay without pay (CITI allows 6 mos free ride)
    3)GSEs and institutional investors are putting back defective mortgages on the originating banks
    4)Homeowers are challenging the legal staus of MERS to foreclose.
    5)The gummint is proposing a review of mortgages on their way to foreclosure (hmmm, an administrative filibuster?)
    And jingle mail is an increasingly attractive option for many homeowers.

    I’d say the odds of a happy ending are extremely remote.

    If the 4 big banks are as deep into the housing mess as they seem I can’t imagine how they will ever come out of this intact (nor should they).Wells Fargo has all those HELOCs and second mortgages – all of which are are at the end of the food chain, well out of the money in the sand states for loans written in the past decade.

  7. Winston Munn says:

    Notes to self from Timmy

    1) Temporary freeze foreclosures – pretend home prices are correct and affordable. (The law of supply and demand will not exist if you close your eyes tightly and wish really hard.)
    2) Change accounting rules so the foreclosures “wished away” do not count against bottom lines and no further erosion of prices will occur.
    3) Count existing foreclosed, empty houses as part of “inventory rebuild” for GDP purposes.
    4) Whistle a happy tune.

  8. hgordon says:

    Expanding on #3 from rktbrkr, mortgage insurers and bond insurers are rescinding or refusing to play claims related to delinquent home loans -


    Christopher Whalen calls this the “zombie dance party”, where banks may have to repurchase delinquent securitized home loans –

    “The wave of loan repurchase demands on securitization sponsors is the next area of fun in the zombie dance party, namely the part where different zombies start to eat each other”

  9. bsneath says:

    This shows the moral hazard of “don’t ask, don’t tell” mark to fiction accounting principles.

    When banks are allowed to hide their losses, presumably because the truth is too painful for the economy to accept, then banks overstate profits. Based on overstated profits, banks provide excessive bonuses and compensation packages. Thus capital that should be reserved to cover anticipated future losses is instead distributed annually as compensation.

    But these losses eventually must be disclosed and when they are the question arises, will the banks have sufficient capital to cover actual losses? And if they do not, what happens next? Can the financial industry absorb them or will the U.S. Treasury be required to cover them? If it is the latter what will be the implications on sovereign credit worthiness, interest rates, future taxation requirements?

    Perhaps the accounting rules had to be altered last year to prevent a complete market meltdown and because assets could not be fairly valued due to market disruption. However, now that the crisis is over, isn’t it time to restore mark to market accounting and allow market forces to reshape the industry?

    Are we not making matters worse by hiding the true financial position of these institutions thus allowing needed capital to shift into compensation?

    If we must continue to “protect the industry from full disclosure”, should we not at a minimum impose substantial fees upon the industry to prepare for the ultimate judgment day? Will the $90 billion assessment proposed by the Obama Administration be sufficient?

  10. wcvarones says:

    Yes, Barry mis-stated the put-backs.

    It’s not the home-owers putting the homes back to the lenders, it’s the investment funds that now own the mortgages putting them back to the originating lender because of fraud in the original loans (fake hombuyer income, fake appraisals, etc.).


    BR: These are two different issues — I was referring to what Home-Owers should be doing

  11. troubled times says:

    Didn’t our government ignore the many warnings about this and when it all blew up didn’t they blame the shorts ? …..That happens when you are ” foxified ” with silly flag waving and blind obedience to the ” miracles of the market place” . Another example of foxification, President Reagan spending big dollars taking your battleships out of mothballs. It was a great photo opportunity that make us proud americans but the ships were outdated and cost tons of money to run. .. Foxification was a Prozac we demanded….Rogar Ailes gave it to us and made billions for News Corp. …The battleship blew up ( you recall that ) , the war in Iraq blew up, housing blew up, the markets blew up.


    BR: I think its more accurate to say that most of the population — Wall Street, Bankers, Home Buyers, lenders, AND the gov’t — ignored the warnings

  12. b_thunder555@yahoo.com says:

    Barry, if the put-backs “movement” grows, will it put banks under significant additional pressure, significant enough to bust the banks’ balance sheet like in 2008? The Bank Attack: defaulting home owners from the front,if you will, and “put-backers” from the rear?

    If that happens, will that mean the END of Tim Geithners’s “extend & pretend” policy, or will the US Treasury pay off the put-backers at par as well?

    Will it be too late (some 3 years into the crisis) and impossibly costly to switch from the Japanese bail-out model to the Swedish resolution model? Will we need a new administration, not just new Treasury secretary to do that?

  13. Heresy house says:

    Is anyone doing a “put-back” on all the bonuses that were based upon the loans that are now being put-back?

  14. Mr.E. says:

    @ b_thunder555@yahoo.com

    It could if mortgage investors get serious.

    This problem surely won’t have a pretty ending. BR has noted 5-10 MM “owers” in homes they can’t afford. According to Moody’s there are currently 4MM homes 90 days or more in arrears and in some state of foreclosure proceedings. As the numbers mount, so will the pressure for put-backs as mortgage investors (e.g. Fannie, Freddie, et al) will be facing even more mounting losses. Treasury’s plan is a n attempt to drastically slow the inevitable

    To make matters worse, home “owers” are losing their fear of foreclosure and are increasingly finding support to just walk away. A recent NPR report revealed that many are finding relief in a walk-away they could not find under mortgage modification. Not surprisingly, there are now organizations / businesses helping those owers walk away from their current housing burden. The punchline here is that home owers are increasingly finding it to their benefit to walk away rather than pursue modification in a house they can’t afford even under modification. Check out

    This will probably get very ugly before it gets better.

  15. troubled times says:

    Barry is right, most ignored the warning signs, most were foxified..But i paid and you paid , with taxes , our government to watch and they sold out to people with far deeper pockets and when it all blew up they blamed the exact same people that tried to warn and it appears that got away with it. CNBC gave the average stiff like myself false hope. CNBC had us all dreaming great dreams without looking at the risk…Not for one second did we DOUBT or question the greatest of out system and that is foxification …Kudlow type blind faith….Those idiots at CNBC were even foxified and they worked for a competitor. ………..Yep, after Watergate, the civil rights movement, Vietnam, the Pentagon papers Rogar Ailes noticed we no longer want a clean mirror, we no longer wanted the truth…..we wanted to go shopping and talk about the crap we bought…..I lack the IQ and skills to write our history correctly but many of you people have the right DNA and inherited characteristics….Get with the shorts and get with the few remaining investigative reporters and review Rogar Ailes …

  16. “…When banks are allowed to hide their losses, presumably because the truth is too painful for the economy to accept, then banks overstate profits. Based on overstated profits, banks provide excessive bonuses and compensation packages. Thus capital that should be reserved to cover anticipated future losses is instead distributed annually as compensation…”–bsneath, above

    is a good point, and a simple, correct, insight, that shows that this ‘Bail-out’/’Work-out’-”Two-Step” is just a Routine–to separate, even, more ‘money’–claims on future productivity–from the American People.

    those *Bonuses are, merely, hush-money/pay-offs to the ~willing co-conspirators..

  17. foxmuldar says:

    Mr.E. Says:

    February 27th, 2010 at 10:36 am
    Another report that seems good …


    Fannie reported Thursday that borrowers of 5.29% of the loans it guarantees were at least 90 days behind as of November, up from 2.13% a year earlier. Fannie guarantees $2.9 trillion in loans.

    At Freddie, such delinquencies reached 3.87% at the end of December, up from 1.72% a year earlier.

    Thanks to Geithner and Obama’s Christmas eve gift to Freddie and Fannie the taxpayers are backing that 2.9 Trillion in Fannie loans. And who knows how much of the Freddie mess.

  18. philipat says:

    Incidentally, there seems to be a widespread amnesia that Companies are actually owned by the shareholders, not the management. So dividends might be a reasonable expectation at some stage? I can’t understand how anyone would invest in any Company whose Board allows management to commit a greater shre of profits to compensation than to dividends.

    With housing, the game is that there is still a suspicion on Wall Street that there is still some private wealth left to destroy. Get Sam to give them a 5K tax credit now then wait for the inevitable (Assuming the basic laws of economics might still apply?) drop in value of another 25K.

  19. budhak0n says:

    Phil this has always been the core of the problem, and for some reason we’re constantly distracted by other things going on to ever address it.

    Although I have to admit that fixing a technicality in operational structure pales in comparison to the prospect of tossing millions of people out on the street with no hope of finding other housing.

    This would be a problem. You have defenses being built. Everybody’s hunkering down.

  20. David Merkel says:

    This seems to be useful for investors, but not for homeowners. Reps and Warranties claims can be enforced by investors that bought loans through securitizations. It does not help homeowners.