U.S. Must ‘Stop Punishing Banks,’ Halt Loan Claims, FBR Says

U.S.-backed firms and agencies should “stop punishing banks” and suspend demands for mortgage repurchases because they’re impeding an economic recovery, according to Paul Miller of FBR Capital Markets & Co.

Repurchase losses may total $121 billion, wrote Miller, a former federal bank examiner, in an analyst’s note to clients dated today. He previously said the tally might range from $54 billion to $106 billion. Losses for Bank of America Corp. (BAC) could reach $66 billion in some scenarios, he wrote.

Fannie Mae, Freddie Mac, the Federal Housing Administration and the Federal Housing Finance Agency “are acting in their own self-interest as opposed to that of the broader U.S. economy,” Miller wrote. Their claims “drain capital from the banking system, and they cause banks to overly tighten credit standards, which pushes potential home buyers onto the sidelines.”

Bank of America, the biggest U.S. lender by assets, led decliners in New York trading last week after the FHFA sued 17 banks to recover losses on mortgage-backed securities sold to Fannie Mae and Freddie Mac. The FHFA is seeking to recoup $196 billion spent on the securities, plus other damages including civil penalties.

“If we are to get the housing market working again, it’s our opinion that the FHFA and the government-sponsored enterprises need to stop punishing banks for their lending practices from several years ago, even though they may have a legal right to do so,” Miller wrote.

The FHFA lawsuit makes clear the U.S. “is committed to breaking up the banking industry,” Richard Bove, an analyst with Rochdale Securities LLC in Lutz, Florida, said yesterday in a research note. The U.S. is ignoring risks that the economy may stall in part because banks stop making loans, he said.

Forbearance Opposed

Neil Barofsky, former special inspector general for the Troubled Asset Relief Program, said last week in an e-mail he’s “strongly opposed” to regulatory forbearance for the lenders, and that any further aid to banks should come with transparency and accountability.

“The government needs to be as aggressive as possible to vindicate the taxpayers’ rights to get as much money from the big banks as possible,” Barofsky said Sept. 2 on Bloomberg Television. “If the government pulls its punches on a valid claim that it would have on this claim on that basis, that’s nothing more than a transfer of money from taxpayer pockets into the shareholders of Bank of America and other banks and that’s an opaque, non-transparent bailout.”

FHFA Responds

The FHFA said in a statement today it is focused on issues other than whether its lawsuits will disrupt the recovery, endanger the targeted banks, or increase their cost of capital.

“While everyone is concerned with these important issues, the long-term stability and resilience of the nation’s financial system depends on investors being able to trust that the securities sold in this country adhere to applicable laws,” the agency said. “We cannot overlook compliance with such requirements during periods of economic difficulty.”

Bank of America said last week that Fannie Mae and Freddie Mac “acknowledged that their losses in the mortgaged-backed securities market were due to the unprecedented downturn in housing prices and other economic factors,” said Larry DiRita, a spokesman for the Charlotte, North Carolina-based lender.

The bank dropped 3.6 percent to $6.99 at 4:15 p.m. in New York Stock Exchange composite trading. New York-based JPMorgan Chase & Co. (JPM) declined 3.4 percent, New York-based Citigroup Inc. (C) fell 2.5 percent and San Francisco-based Wells Fargo, the biggest U.S. home lender, slipped 1.2 percent.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

To contact the editor responsible for this story: Rick Green at rgreen18@bloomberg.net

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