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Mortgage Putbacks Must Change, Former Freddie Credit Chief Says

Fannie Mae and Freddie Mac should charge more to guarantee mortgages if lenders make loans with underwriting flaws, rather than punish banks after debts default by demanding repurchases, according to Freddie Mac’s former chief credit officer.

“The way it should be paid for is not through a call on your balance sheet, but through the price,” said Ray Romano, who earlier this year joined Genworth Financial Inc.’s U.S mortgage-insurance unit. “What we’ve done as an industry is we’ve provided investors a put option against changes in economic conditions for a risk they were supposed to take.”

Fannie Mae and Freddie Mac, the government-controlled mortgage-finance companies that are being supported by injections of taxpayer capital after being seized in 2008, have been using so-called putbacks to lessen the costs of their bailouts amid record foreclosures.

The two companies and their regulator, the Federal Housing Finance Agency, are aware that repurchases are “potentially cutting off a really sizable portion of the marketplace” by pushing lenders to avoid new loans that might default, Romano said today at a Mortgage Bankers Association conference. That, in turn, can depress home prices and damage the firms.

One solution would be for Fannie Mae and Freddie Mac to review samples of new loans for defects, and then offer more expensive pricing to lenders with error rates that exceed some benchmark, said Romano, a senior vice president at Genworth. Fannie Mae, Freddie Mac and the FHFA are exploring various approaches to the issue, he said at the event in New York.

Costs to Lenders

Repurchase demands from Fannie Mae and Freddie Mac and increased efforts by private investors mean the costs to lenders aren’t close to subsiding, said Thomas Cronin, a managing director at Collingwood Group LLC, and Michael Lau, an executive vice president at Phoenix Capital Inc.

A “secondary” wave of repurchases is set to hit regional banks and other smaller lenders as bigger banks target the companies they bought loans from after being forced to bear losses by the ultimate purchasers of the debt, said Brendan Keane, a senior vice president in the advisory and valuation group at CoreLogic Inc. His company works with firms both pursuing and defending against putbacks.

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