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Wells Fargo Adds $669 Million to Buy Back Bad Home Loans

Wells Fargo & Co. (WFC), the biggest U.S. home lender, braced itself for more demands for refunds of faulty mortgages by adding the most to a reserve fund covering such claims since at least 2009.

The bank cited stepped-up scrutiny by government-backed buyers such as Fannie Mae and Freddie Mac as it set aside $669 million in the second quarter, San Francisco-based Wells Fargo said in a statement. The lender said it expects more demands for refunds on loans sold to the two firms from 2006 through 2008.

Fannie Mae and Freddie Mac, the so-called government- sponsored enterprises, are seeking reimbursement after buying mortgages during the U.S. housing bubble that were backed by faulty data about borrowers and properties. The flaws give the GSEs the right to “put back” the mortgages, or resell them to banks, boosting costs for lenders including Wells Fargo.

“This addition to the reserve was a result of our ongoing dialogue with them including some communication very late in the quarter,” Wells Fargo Chief Financial Officer Tim Sloan told analysts on a conference call. “We believe the additional reserve we added this quarter is appropriate to cover losses associated with these higher-than-expected demands.”

Sloan, 52, said he continues to see “behavioral changes” from the GSEs, echoing other banks that have seen increased scrutiny from the GSEs. McLean, Virginia-based Freddie Mac and Washington-based Fannie Mae were seized by the U.S. in September 2008 after purchases of risky loans pushed the firms to the brink of collapse. Since then, the two taxpayer-owned firms have received almost $190 billion from the U.S. Treasury Department.

‘Healthy Conversation’

Wells Fargo, led by Chief Executive Officer John Stumpf, 58, had $1.67 billion in outstanding repurchase demands at the end of the quarter, according to the statement. The bank had $1.76 billion in repurchase reserves as of June 30.

“There’s going to be a lot of healthy conversation with the agencies on whatever future demands they’re going to provide,” Sloan said. “These were based on conversations in which we expected future demands, as opposed to specific demands.”

Wells Fargo’s costs tied to faulty mortgages and shoddy foreclosures now exceed $7 billion, according to data compiled by Bloomberg. The bank said yesterday it will pay $125 million and set up a $50 million assistance fund to settle U.S. allegations that it discriminated against minority borrowers.

Expenses tied to faulty mortgages and foreclosures have cost the five biggest U.S. home lenders more than $72 billion since 2007, according to data compiled by Bloomberg.

Wells Fargo reported today that second-quarter profit rose 17 percent to a record $4.62 billion on strength in new mortgage loans.

To contact the reporters on this story: Donal Griffin in New York at dgriffin10@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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