A bank raises the funds it needs to secure mortgage loans through a variety of investors. Mortgage-backed securities, such as bonds, are an example of how a financial institution might raise money to lend to homeowners. In exchange for lending the bank money, the investor receives a claim to get back the original dollar amount plus interest. The bank uses the mortgage payments it receives from homeowners to pay back its investors. A mortgage buyback request is an action initiated by the investor which asks the bank to immediately pay back the value of the investment.
If banks issue mortgages to loan applicants who knowingly provide false information, they may need to repurchase those loans. A mortgage servicer or lending company is often the first point of contact for a loan applicant. In order to get approved for a mortgage, the applicant must provide proof of identity, income and a credit history. Applicants who use false Social Security numbers in order to secure a mortgage usually have a low likelihood of paying the money back. Banks may receive claims from investors of mortgage-backed securities when and if payment default occurs.
A common reason for mortgage buyback requests is misleading or error-ridden documentation. Mortgage lenders usually have to follow certain federal disclosure guidelines and procedures during the application process. For example, if a mortgage servicer stands to make money from the transaction it must disclose that information to the applicant. In most cases, the servicer or lender must also inform the potential borrower of the cost of the loan. The lender must provide details regarding origination fees and interest charges over the life of the loan.
Mortgages that become delinquent due to successive non-payments are at risk for bank repurchase requests. A buyback request is essentially a claim against expected income from the investor's perspective. If homeowners do not make their monthly mortgage payments and the bank is unable to re-sell the property to recoup its loss, investors may rescind their financial support. It is similar to the concept of a stock owner selling his shares in a failing company. He attempts to salvage his investment as much as possible by selling the shares that still have financial value.
Mortgage buyback requests might originate from government agencies, such as Fannie Mae and Freddie Mac. These federal agencies set the standards for mortgages, including minimum debt-to-income ratios and down-payment requirements. The majority of investors of mortgage-backed securities come from the private sector. Private investors and government agencies may initiate buyback requests even if the market performance of mortgage-backed securities is adequate. Fear and speculation over impending loan defaults may cause many investors to pull out.
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