Mortgage Problems

We think it interesting to note that several financial firms have taken hits to earnings recently as mortgages they underwrote have come back to haunt them. The issue: mortgages are often booked, then sold to mortgage consolidators. If problems surface on repayment of the loan, the consolidators may come back to the originator and claim that there was inadequate due diligence or weak underwriting standards. They can demand compensation or they may push the non-performing mortgage back to the originator. This could be a sleeper issue for banks and other financial institutions if the real estate down cycle lasts much longer. Many regional bank's stocks are near all-time highs yet a high proportion of recent revenue increases were from mortgage originations and related interest income.