Replacing Fannie Overseer May Limit Loan Putbacks, Rosner Says

Efforts by Fannie Mae and Freddie Mac to force sellers to repurchase soured mortgages may be weakened by the replacement of their “very aggressive” regulator, Graham Fisher & Co. analyst Joshua Rosner said.

Under government conservatorships managed since August 2009 by Federal Housing Finance Agency Acting Director Edward J. DeMarco, the companies have been the biggest cause of so-called putback requests to lenders, with outstanding amounts related to mortgages they directly own or insure totaling $13.3 billion on Sept. 30, according to securities filings.

The companies have also joined groups of investors in mortgage bonds without government-backed guarantees seeking to enforce their rights as owners of the securities, which analysts including at JPMorgan Chase & Co. say may be a bigger threat to banks. DeMarco’s agency itself has also issued 64 subpoenas to companies including JPMorgan and Capital One Inc. seeking files related to such securities.

“His understandings have led him to be very aggressive on putbacks as he has a firm belief on what the role of a conservator should be,” said Rosner, an analyst at the New York-based research firm who in 2007 predicted the collapse in so-called non-agency mortgage bonds. “I’m not sure a political appointee without as much experience will be as devout.”

President Barack Obama will nominate North Carolina Banking Commissioner Joseph A. Smith Jr. to replace DeMarco, the White House said today in a statement. The agency has overseen Fannie Mae and Freddie Mac, which own or guarantee about half of U.S. mortgages, since they were seized in September 2008 amid a financial crisis that pushed them to the brink of collapse.

Forced Repurchases

DeMarco, who joined a predecessor agency in 2006, has led FHFA since former Director James Lockhart resigned. He previously worked with Lockhart as assistant deputy commissioner at the Social Security Administration. DeMarco has said that by forcing repurchases of mortgages whose quality failed to meet sellers’ representations, the companies can limit their U.S. aid, which so far totals about $150 billion.

“The losses are extraordinary and we owe it to the American taxpayer to find out where these losses are coming from,” he told a House Financial Services subcommittee on Sept. 15.

“We’ve appreciated Ed DeMarco’s attention to this issue,” Chris Katopis, executive director of the Association of Mortgage Investors, said today in a telephone interview. The Washington- based trade group for buyers of home-loan securities was formed earlier this year.

Loss Estimates

Lenders’ losses from repurchasing home loans in securities guaranteed by Fannie Mae and Freddie Mac may reach as much as $35 billion, according to an Oct. 29 report by JPMorgan analysts. Losses on first mortgages packaged into other bonds may total $85 billion in a “stress” scenario, with second mortgages adding as much as an additional $8 billion. Some liable lenders have failed, they said.

Freddie Mac of McLean, Virginia, was among bondholders that also included Pacific Investment Management Co. and the Federal Reserve Bank of New York that told Bank of America Corp. in an Oct. 18 letter that the bank is aware that the quality of loans packaged into securities by its Countrywide Financial Corp. unit was misrepresented and that it is improperly overseeing outstanding debt. Washington-based Fannie Mae isn’t part of the group.

A larger group of investors with more than $600 billion of bonds coordinating through Dallas lawyer Talcott Franklin includes at least Fannie Mae, people familiar with the matter have said. Investors are banding together because they typically must own at least 25 percent of securitizations to access loan files or force action by bond trustees.

Smith’s Background

Before being named banking commissioner in 2002, Smith was a lawyer with Thacher Proffitt & Wood, a New York law firm. From 1991 to 2000, he was general counsel and secretary for Centura Banks Inc. in Rocky Mount, North Carolina. Prior to that he was a partner with Poyner & Spruill in Raleigh, North Carolina.

“While I don’t know his views, it’s notable that he comes from North Carolina,” Rosner said. Bank of America is based in Charlotte and Wachovia Corp., another big lender, had its headquarters there before being purchased by San Francisco-based Wells Fargo Co.

Representative Brad Miller, a North Carolina Democrat who argued for leaving DeMarco in place, called Smith a “straight- shooter” in a telephone interview.

“There was concern in the early summer that DeMarco would be pushed out for someone more sympathetic to the banks,” Miller said. “I very much hope Joe will continue to pursue any potential liability that will reduce taxpayers’ ultimate loss.”

To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net Lorraine Woellert in Washington at lwoellert@bloomberg.net.

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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