Mortgage Lenders Seeking Relief From Forced Repurchases of Failing Debt

Mortgage lenders are seeking relief from Fannie Mae and Freddie Mac as the government-supported companies force them to buy back more soured debt, said John Courson, president of the industry’s largest trade group.

While his members “certainly understand” their contracts require repurchases of defaulted loans when faulty appraisals, inflated borrower incomes or missing documentation are discovered, the Mortgage Bankers Association has started to “aggressively” push the two companies and their regulator to ease up, he said.

Fannie Mae and Freddie Mac, propped up by unlimited taxpayer capital, should acknowledge lenders are unfairly absorbing too many losses, with unemployment that reached a 27- year high among the causes of defaults unrelated to loan quality, Courson said in an interview at Bloomberg News headquarters in New York yesterday.

“We’re trying to see if we can’t reach some type of a system that says there is a bright line out there, if this loan has been making payments and defaulted for a reason that is neither fraud nor related to the underwriting of the loan, it shouldn’t be subject to a repurchase,” he said.

Last quarter, the companies forced lenders to repurchase $3.1 billion of loans, up 63 percent from a year earlier, after defaults surged to the highest since the Great Depression, according to regulatory filings. Bank of America Corp. and JPMorgan Chase & Co. are among banks that reported setting aside money to cover such demands.

Repurchase Requests

Freddie Mac, based in McLean, Virginia, had $4.8 billion of repurchase requests pending as of March 31, up from $3.8 billion on Dec. 31. Washington-based Fannie Mae hasn’t made a similar disclosure.

Repurchases are “triggered when loans are out of compliance with our contractual requirements” or legal ones, or involve fraud, Brad German, a spokesman for Freddie Mac, said in a telephone interview. “Because we are trying to be good stewards of taxpayers’ dollars, it is very important that not one of those dollars goes to loans that should have not been sold to us.”

Corinne Russell, a spokeswoman for the Federal Housing Finance Agency, the companies’ regulator, declined to comment.

“We make repurchase requests when issues related to compliance with our underwriting and eligibility guidelines are detected after loans become delinquent or have gone through the foreclosure process,” Janis Smith, a Fannie Mae spokeswoman, said in an e-mail.

Upfront Requirements

The company is creating new upfront lender requirements to “promote improved loan delivery data that is complete, accurate, and fully reflective of the terms of the mortgage,” which should reduce future repurchase demands, she said. The so- called loan quality initiative takes effect June 1.

The U.S. government seized Fannie Mae and Freddie Mac, which own or guarantee almost $5 trillion of U.S. housing debt, in September 2008, and has guided their actions during their so called conservatorships. They’ve drawn $145 billion in aid from the Treasury Department.

The companies are being too tough on so-called put-backs, following the Federal Housing Finance Agency’s encouragement to be aggressive, Courson said. If a borrower made on-time payments for two or three years before defaulting, that’s a sign that underwriting quality wasn’t a problem and a lender shouldn’t be forced to take back the loan, he said.

Multiple Requests

“Lenders are getting repurchase requests on the same loan at multiple times for multiple issues, which shows you they’re going from station one, to station two, to station three” as the companies and their contractors “scrub” loan files looking for errors that weren’t material or never occurred, he said.

Freddie Mac goes “through a process with our customers to give them an opportunity to correct deficiencies,” German said.

Lenders are spending “huge” amounts defending against requests and documenting how items flagged as errors actually aren’t, Courson said. The mortgage bankers’ group held one workshop on dealing with the issue, and plans another next month.

Mortgage insurer MGIC Investment Corp. is among companies overcoming potential losses by denying claims because loans didn’t match lenders’ descriptions, while bond guarantor MBIA Inc. is doing so by seeking reimbursement. Mortgage insurers have been turning down 20 percent to 25 percent of claims in recent quarters, up from 7 percent historically, according to a December report by Moody’s Investors Service.

Mortgage Insurance

When loan insurers rescind coverage on a Fannie Mae or Freddie Mac mortgage, which requires such protection when loan- to-value ratios exceed 80 percent, lenders typically need to buy back the debt. Repurchases by bigger lenders often prompt banks to try to return loans to the lenders from whom they acquired them before they were sold to Fannie Mae or Freddie Mac.

Repurchases will be “an issue for the next 24 to 36 months for all us,” Steven Jacobson, chief executive officer of Madison, Wisconsin-based Fairway Independent Mortgage Corp., said in a May 24 interview at a conference held in New York by the Washington-based Mortgage Bankers Association. The company last year originated more than $3 billion in mortgages. “Any big bank can put any one of us out of business.”

JPMorgan set aside $523 million to cover losses from future buybacks in the first quarter, bringing its total provision to $2 billion, the company said in a securities filing this month. The bank said it repurchased $322 million in loans from Fannie Mae and Freddie Mac during the quarter.

Bank Provisions

Bank of America said it had a liability of $3.3 billion on March 31 for its so-called representations and warranties on mortgages. The lender said in a May 7 filing it “has experienced increasing repurchase and similar requests from, and disputes with, buyers and insurers including monoline financial guarantors. The corporation has and will continue to contest such demands that it does not believe are valid.” Monolines refers to the bond insurers.

Tom Kelly, a spokesman for New York-based JPMorgan, and Scott Silvestri, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

• Tweet
• More
  • Business Exchange
  • Buzz up!
  • Digg
• Print
• Email