Thursday, February 15, 2007

Bad Loans Being Returned

MSNBC has an interesting article today about how large banks are forcing mortgage originators to buy back their bad loans. The story says that some banks have a contractual right to force the mortgage originators to buy back bad loans - loans that default early in their life or have mistakes, such as flawed property appraisals.

We all know the increase in interest rates has caused an increase in foreclosures. This is the first I've heard that the bad loans can come back to hurt the mortgage originator and not the current note holder. Seems like the increase in foreclosures is getting so large, no one wants to be left holding the bag.

I think I have to side with the banks on this one. Mortgage originators relaxed their standards so much, you could get a practically get a loan just as long as you were breathing. This is obviously the fault of the mortgage originators. But on the other hand, surely the banks get some information about the mortgages they are buying. They must have had some clue about the risks they were taking on. Unfortunately, I don't know enough details about the note buying and selling process to have an opinion on the banks' acquiescence in this, so I have to go back to blaming the folks who let the loans be made in the first place.

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