Fannie Mae and Freddie Mac are facing growing resistance as they attempt to push failed home loans off their books and onto the balance sheets of banks including Bank of America Corp. and JPMorgan Chase & Co.
The two government-owned mortgage companies are enforcing contracts that require lenders to buy back loans that didn’t meet underwriting standards. At the end of September, the companies reported, banks hadn’t responded to $13 billion in buyback requests. A third of those were at least four months old and Freddie Mac has begun to assess penalties for the delays.
Lenders say they are resisting buybacks because McLean, Virginia-based Freddie Mac and Washington-based Fannie Mae are unfairly second-guessing old appraisals, accusing originators of failing to verify income, or pinning failed loans on minor technical errors. Larger banks say they can handle the potential losses. Some smaller lenders say the strain could sink them.
About 40 percent of repurchase requests are rescinded after lenders provide additional paperwork, said John A. Courson, chief executive officer of the Mortgage Bankers Association, a Washington trade group.
“We’re burning a lot of stockholder resources, and clearly a lot of Fannie and Freddie resources, to have 40 percent of these things rescinded,” Courson said in an interview. “It hurts the banks and frankly we’re wasting government resources, too.”
‘Reasons are Grayer’
Fannie Mae and Freddie Mac, known as government-sponsored enterprises or GSEs, have been operating under U.S. conservatorship since 2008. They have tightened credit standards and cut spending as they prepare for a government reorganization of mortgage finance that the administration of President Barack Obama could propose as soon as next year. They say the mounting buyback demands are the result of growing delinquencies, not new enforcement.
“This is the first time in history you’ve seen this much pushback against the GSEs,” said Guy Cecala, publisher of Inside Mortgage Finance, an industry trade publication in Bethesda, Maryland. “It’s just the volume of it. It’s bigger numbers. And this time the reasons are a lot grayer.”
Analysts say that banks’ total exposure to losses stemming from Fannie Mae and Freddie Mac buyback requests is probably limited to an amount that large banks, at least, will be able to handle.
Overall, 33 percent to 39 percent of loans questioned by the GSEs are leading to buybacks, which could result in $20 billion to $33 billion in losses by the banks, analysts at FBR Capital Markets reported on Nov. 29. In an Oct. 29 research note, Credit Suisse Group AG analysts estimated that Fannie Mae and Freddie Mac would successfully be able to put back 5 percent of their delinquent loans, recovering between $15 billion and $20 billion.
“The overall loss amount is pretty contained from the GSEs,” Mahesh Swaminathan, a Credit Suisse mortgage strategist, said in an interview.
A bigger risk to large banks could be the private mortgage-backed securities issued by investment banks when subprime lending was at its peak, analysts say.
Repurchase demands from GSEs and private investors combined could cost financial institutions between $54 billion and $106 billion, the FBR analysts said in their Nov. 29 note. JPMorgan analysts in an Oct. 15 report put the total at $55 billion to $120 billion.
Chris Gamaitoni, a Compass Point Research and Trading LLC analyst, said in August that private-label buybacks and related legal expenses could cost banks as much as $179.2 billion.
Of the 30 million mortgages that Fannie Mae and Freddie Mac currently own or guarantee, 1.3 million are more than 90 days past due, the Federal Housing Finance Agency, the GSEs’ overseer, reported Nov. 18.
Fannie Mae and Freddie Mac say they have always sampled new loans for errors, which leads to some buyback demands. The vast majority, however, are the result of scrutiny that comes after borrowers fall behind.
“There’s no new policy. This is something that’s always been done,” said Freddie Mac spokesman Brad German. “The fact that more defaulted loans are triggering reviews that may lead to repurchase requests, given the volume of defaults, is not entirely surprising.”
Courson, of the mortgage bankers group, said the industry’s concerns about the buybacks go beyond the volume. “It’s the nature of the requests, where so many try to assert a defect that has no actual bearing on the individual loan’s performance,” he said.
Lenders say that while Fannie Mae and Freddie Mac are asserting that loans went bad because of faulty underwriting, the leading cause of default is actually unemployment.
“If a loan paid for five years, then the client lost their job and somebody goes back and says, ‘You didn’t dot that I or cross that T,’ technically the originator has to buy that loan back,” William C. Emerson, chief executive officer of Detroit- based Quicken Loans, said in an interview. “Loans are being put back for very vague, gray reasons.”
Fannie Mae lenders paid the company for losses on $1.6 billion worth of loans last quarter and the company has outstanding demands on loans worth $7.7 billion more, the company reported in a third-quarter filing with the U.S. Securities and Exchange Commission. It was the first time the company has reported how much of its buyback requests were outstanding.
Freddie Mac won payments on $1.7 billion worth of loans and made demands on another $5.6 billion as of the end of September, about the same as three months ago and up from $4.8 billion at the end of March, the company reported. The amount lenders might actually owe could be far less, depending on how much of the loan has been paid down and whether the GSEs have recovered any costs, for example from a foreclosure sale.
The biggest mortgage lenders and servicers say they are confident they can manage demands from the GSEs. Charlotte, North Carolina-based Bank of America, which acquired troubled mortgage lender Countrywide Financial Corp. in 2008, has received $18 billion in claims from Fannie Mae and Freddie Mac for loans made during the housing bubble, with another $6.6 billion outstanding. The company estimates it is about two-thirds of the way through its GSE claims.
San Francisco-based Wells Fargo & Co., which acquired Wachovia and its large home loan portfolio during the credit crisis in 2008, has reduced reserves to buy back soured mortgages to $1.3 billion from $1.4 billion, reflecting a decline in GSE demands, the company reported.
JPMorgan on Nov. 4 reported an increase in demands from the GSEs and private investors. The New York-based company reported $2.9 billion in repurchase demands so far this year, compared with $3 billion for all of 2009 and $2 billion the year before.
At the same time, the bank reached agreement with Fannie Mae and Freddie Mac on repurchase demands for a portion of its loan portfolio, those it acquired through the 2008 acquisition of Washington Mutual, whose collapse was blamed on subprime lending.
“We should be near the end of the process as it relates to the GSEs,” JPMorgan’s Chief Financial Officer Doug Braunstein said Nov. 17 in New York.
As for smaller mortgage lenders, their financial situation may be more precarious. Officials from smaller banks say the ultimate victims could be homebuyers, who are finding it harder to get loans even when they meet Fannie Mae and Freddie Mac standards.
Fear of Future Buybacks
“On one hand you’ve got the administration saying we want you out there lending money to help bring on the recovery, but we find ourselves as an industry rejecting loans because of fear of future buybacks,” said Ron J. McCord, chairman of First Mortgage Co., an Oklahoma City lender and servicer that originates more than $1 billion a year.
In Washington, the government role in the mortgage market remains under debate. The Obama administration is scheduled to release a plan for overhauling the GSEs in January, while some Republican leaders are calling for Fannie Mae and Freddie Mac to be dismantled entirely.
Democrats and Republicans alike are pressing for the GSEs to return to solvency and repay taxpayer funds.
“We need to pursue all available legal claims to limit the losses to taxpayers,” said Representative Brad Miller, a North Carolina Democrat who serves on the House Financial Services Committee.
The GSEs should get what they’re owed and leave it to regulators to take action later if buybacks cause problems for banks, said Phillip Swagel, a former assistant Treasury secretary under President George W. Bush
“It’s better to uncover everything and for people to face up to their obligations,” Swagel said.