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Additionally, the general turmoil in the subprime industry caused prices for loans in the secondary mortgage market to decline. This gave investor an even greater incentive to hunt down loans that were eligible to be put back. There quickly developed an arbitrage play in which the investor could force a repurchase of any loan that was technically noncompliant at the high original price and then purchase the same or a similar loan at the lower current price. The spread became large enough to justify the investors going to considerable expense to find those noncompliant loans. 

Mortgage lenders - especially those that are not banks -need to sell the morgage loans they originate in order to get cash to make more loans. Most subprime lenders are not banks, so they engage in this so-called secondary mortgage market, selling packages of loans to investors. The investors are typically affiliates of investment banks and institutional investors that either hold the loans or repackage them into securities. When loans are sold in the secondary market, the contracts of sale have always included lots of representations and warranties about the characteristics of the individual loans. The seller represents to the buyer all sorts of details about the loans -things like the loan-to-value ratio the interest rate and the loan type, the FICO score of each borrower, the absence of any environmental hazard on the property, the location of the property,the presence of the correct loan documents in the mortgage file, and 30 to 40 other specific details. The contract says that if any of these representations is not true, the loan must be  repurchased by the seller. There are so many loans being traded in the secondary mortgage market that it would be an absolute miracle if all of the representations about all of the loans were true. To some extent the subjects of the representations are not even things the seller could possibly know for sure at the time of sale. These representations are included for the prupose of allocationg the risk between the buyer and the seller. Others could be known and generally are satisified, but might sometimes be incorrect due to simple mistakes. In the past, buyers of loans would not actually go looking for these errors until a loan stopped performing. As a practical matter, therefore, sellers were asked only to repurchase the subset of noncomplying loans that actually became collection problems. In the recent environment of declining profits and losses, however, it is not surprising that investor who had previously purchased packages of loans decided it would be a good idea to start scrutinizing their protfolios for violations of representations and warranties, even before loans defaulted. The logic was to find all the loans that were susceptible of being repurchased, while the mortgage company that had sold the loan was still solvent and able to make the repurchase. 

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