Government-owned mortgage companies Fannie Mae and Freddie Mac are encountering strong resistance from mortgage institutions and banks such as Bank of America and JPMorgan Chase in their drive to transfer defaulted home loans back to their original lenders.
Fannie Mae and Freddie Mac are putting into effect agreements calling for banks to repurchase loans that did not comply with the government’s underwriting regulations. By end of September, lenders had yet to react to these calls to buy back $13 billion in loans. Freddie Mac has already begun the process to impose penalties for the bad loans, one-third of which are four months old and older.
The banks’ defiance of the Virginia-based Freddie Mac and Washington-based Fannie Mae stem from their belief that the federal mortgage agencies are doubting appraisals done by loan originators whom, they also claim, failed to verify income. Fannie Mae and Freddie Mac have also been nit-picking defaulted loans for every petty procedural fault. Smaller lenders are complaining that forced buy backs might lead to them going under, even if bigger banks are capable of the shouldering the burden.
In the interview with Bloomberg News, John A Courson, chief executive officer of the Mortgage Bankers Association, estimated that 40 percent of buy back requests are retracted once banks come up with supplementary supporting documents, Courson said, “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a lot of stockholder resources, and clearly a lot of Fannie and Freddie resources, to have 40 percent of these things rescinded. It hurts the banks and frankly we’re wasting government resources, too.”
Since 2008, the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have been operating as the federal government’s supervisory arm on mortgage lending practices. Under them, tighter credit limits have been imposed while they cut their budgets in preparation for a restructuring of mortgage financing under the current Obama administration. They deny that their demands for banks to repurchase loans as part of a new regulation, classifying them instead as an essential move to curb the increasing number of default loans.
“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, also quoted by Bloomberg News. “It’s just the volume of it. It’s bigger numbers. And this time the reasons are a lot grayer.”
The banks’ total exposure to losses from the buy back requests will likely be limited to an amount that big banks can handle, analysts say. 33 to 39 percent of the problem loans identified by Fannie Mae and Freddie Mac end up in the repurchase program. That could mean $20 billion to $33 billion in losses for the banks, according to an analysis by FBR Capital Markets dated Nov. 29. Credit Suisse Group AG analysts, in an Oct. 29 research note, projected that the GSEs would be able to recover $15 to $20 billion if they succeed in pushing back 5 percent of their delinquent loans.
Sub-prime private mortgage riskier to large banks
Mahesh Swaminathan, a Credit Suisse mortgage strategist, was reported by Bloomberg News as saying, “The overall loss amount is pretty contained from the GSEs.” What could be riskier for large banks, say analysts, are private mortgage-backed securities issued by investment banks at the peak of the subprime lending period.
Buy back requests by both the GSEs and private investors could lead to financial institutions having to cough up $54 billion to $106 billion, according to the Nov. 29 FBR analyses. In an Oct. 15 report by JPMorgan, the costs were estimated at $55 billion to $120 billion. Back in August, Chris Gamaitoni, an analyst with Compass Point Research and Trading LLC, had revealed that private-investment buy backs and connected legal costs will put a $179.2 billion hole in the banks.
On Nov. 18, the Federal Housing Finance Agency that oversees Fannie and Freddy, reported that out of the 30 million mortgages guaranteed or owned by the GSEs, 1.3 million were past due 90 days. The GSEs have always claimed they routinely check new loans for any mistakes which inevitably result in buy back requests. “There’s no new policy. This is something that’s always been done,” said Freddie Mac spokesman Brad German to Bloomberg News. “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, CEO of Mortgage Bankers Association, 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.”
Fannie Mae and Freddie Mac are insisting that loans went awry due to errors in underwriting but the real cause of the problem is unemployment, lenders argue. “If a loan’s 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, was quoted as saying. “Loans are being put back for very vague, gray reasons.”
Last quarter, Fannie Mae lenders had to pay the company for losses on $1.6 million worth of loans and the GSE still has outstanding buy back demands on loans worth $7.7 billion. These figures were filed by the GSE in the third-quarter with the US Securities and Exchange Commission. That was the first time the GSE had made public the amount of its outstanding buy back demands.
At the end of September, Freddie Mac reported that it had gained payments on $1.7 billion worth of loans and made demands on another $5.6 billion, about the same as the previous three months, an increase from $4.8 billion at the end of March. Lenders might actually owe less. It’s all a matter of how much the loan has been paid down and whether the GSEs have recovered any costs, for instance, from the sale of a foreclosed property.
Demands Manageable To Large Lenders
Larger lenders and servicers say they can manage the demands from Fannie Mae and Freddy Mac. Bank of America, which took over the sinking Countrywide Financial Corp. in 2008, has received $18 billion in claims from both the GSEs for loans made before the bursting of the housing bubble, with another $6.6 billion pending. The bank reckons that it is nearly two-thirds through on its way on GSE claims.
Wells Fargo, which bought out Wachovia and its home loans division during the financial meltdown of 2008, has cut back its reserves to re-purchase delinquent mortgages down to $1.3 billion from $1.4 billion, also indicating a decline in GSE demands.
In contrast, JPMorgan reported an increase in demands from the GSEs and private investors in November. 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. Concurrently, the company made a deal with the GSEs to buy back demands for a segment of the loan portfolio it had obtained by acquiring Washington Mutual in 2008, after the latter had collapsed under the weight of sub-prime lending. “We should be near the end of the process as it relates to the GSEs,” JPMorgan’s Chief Financial Officer Doug Braunstein, was reported as saying Nov. 17 in New York.
The prospects for smaller lending firms to hold up to the situation are less bright. Executives of these firms believe that ultimately, homebuyers would be the ones most affected because they would find it harder to be approved for loans even if they meet all the requirements of the GSEs.
“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, as reported by Bloomberg News. The company originates more than $1 billion in loans a year.
The government role in the mortgage market is still being hotly debated back in Washington. A plan to overhaul the GSEs in January has been scheduled by the Obama Administration amidst calls by Republicans to disband the agencies altogether. Both Democrats and Republicans are pressuring Fannie Mae and Freddie Mac to become solvent again and reimburse taxpayers for playing their roles in government bailouts. “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 as reported by Bloomberg News.
Fannie Mae and Freddie Mac should take what they are owed and leave it to regulators to make the decision to take action down the road if buy backs are causing problems to 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 concluded.
By: Faridah Huller, Editor
Mortgage Lending News, LLC
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Eric Burgess has written 75 articles on Mr. Mortgage @ Mason McDuffie Mortgage
