On Bank of America’s Loan-by-Loan Fight in Putbacks

It’s more than a bit puzzling when readers get upset when once in a great while, we point out how the case against banks on a particular issue is overstated. The reaction seems to be that we’ve suddenly gone soft on financial firm miscreants, which is about as wide of the mark as you can get.

Overhyped attacks on authority (and unfortunately for us all, banks are very much part of the officialdom) backfire. They allow the defenders of the orthodoxy to paint critics as hysterical, reckless, and ill informed. As a result, the best chance for reining in the industry is to make charges that stick.

One area where the case against banks is exaggerated is non-GSE mortgage putback actions. In very simple terms, the servicer on a securitization, on behalf of the trust, has an obligation to “put back”, as in return to the originator, loans that are in violation of the representations and warranties made in the securitization agreement. There is a big difference between putback provisions on GSE paper, where Freddie and Fannie have strong rights to insist on putbacks, versus in so-called non-GSE (aka