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Mortgage Buybacks to Cost $3.4 Billion from Freddie Mac

Mortgage Buybacks Seen Costing U.S. Banks $3.4 Billion From GSEs
The original audit of Freddie Mac’s loan review practices, published in September 2011, was prompted by auditors’ concerns that the firm wasn’t aggressive enough in seeking repurchases from Bank of America Corp. for defaults on loans issued by Countrywide Financial Corp. Photographer: Scott Eells/Bloomberg

Sept. 13 (Bloomberg) -- Freddie Mac may win an additional $3.4 billion in mortgage buybacks from banks under increased scrutiny of defaulted loans originated during the housing bubble, according to a U.S. auditor’s report.

“Initial results already show substantial recoveries are being achieved,” the Federal Housing Finance Agency inspector general’s office said today in the report, which cited the taxpayer-owned mortgage financier’s move this year to expand reviews of loans issued from 2005 to 2007.

Freddie Mac could save $800 million to $1.2 billion for reviews completed this year alone, according to the report. That money will benefit U.S. taxpayers, who have spent $190 billion to aid Freddie Mac and larger rival Fannie Mae since they were taken into federal conservatorship in 2008.

The two government-sponsored enterprises provide liquidity by buying mortgages and packaging them into securities on which they guarantee interest and principal payments. They can force banks to repurchase loans if reviews find the underwriting didn’t meet standards set out in sales contracts.

The increased scrutiny cited in the FHFA report applies to defaulted loans already owned or guaranteed by the GSEs. In response to bank complaints that the repurchase requests were too aggressive, the agency this week announced changes in review procedures for loans delivered after Jan. 1.

Potential Defects

Under the new system, Freddie Mac of McLean, Virginia, and Washington-based Fannie Mae will use data collected on the loans they buy to spot potential defects. They will review samples within three months of purchase instead of waiting until borrowers default, and loans with three years of consecutive on-time payments will be exempt from buybacks unless there has been fraud.

The two companies asked banks to buy back mortgages with an unpaid principal balance of $18.9 billion in the first two quarters of this year.

Banks usually end up paying about half of the unpaid principal balance when a putback demand is successful, according to the companies.

The original audit of Freddie Mac’s loan review practices, published in September 2011, was prompted by auditors’ concerns that the firm wasn’t aggressive enough in seeking repurchases from Bank of America Corp. for defaults on loans issued by Countrywide Financial Corp.

Freddie Mac and Bank of America, which bought Countrywide in 2008, settled those claims for $1.35 billion in January 2011.

The settlement means Countrywide loans won’t be subject to Freddie Mac’s increased scrutiny.

To contact the reporter on this story: Clea Benson in Washington at cbenson20@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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