How it works (Example):
Once a lender completes a mortgage, the lender often sells it to another investor in the secondary mortgage market. Under certain circumstances, questions may arise regarding the borrower's application and the possibility of fraud. If the mortgage needs to be investigated, the mortgage buyer may force a mortgage putback, forcing the original lender to repurchase the mortgage from the current owner.
Why it Matters:
Mortgage putback clauses protect investors from the possibility that the original lender had careless lending protocols and/or was unknowingly defrauded by borrowers. Because the subsequent owners have the right to force the original lender to repurchase the mortgage, in theory the original owners will be more diligent about who they are lending to.