Fannie, Freddie Ramp up Efforts to Force Loan Buybacks
Fannie Mae and Freddie Mac are ramping up efforts to force banks to buy back bad loans, which will mean more mortgage losses for banks, Reuters reported Aug. 15. The loans under review were issued between 2005 and 2008.
Buyback requests from Fannie during the second quarter increased 20 percent from the first quarter and totaled $14.6 billion. Freddie had outstanding purchase requests of $2.9 billion at the end of the second quarter, down from $3.2 billion at the end of the first quarter, but up from the fourth quarter of 2011 when repurchase requests totaled $2.7 billion.
The nation’s largest banks, including Bank of America, Wells Fargo and PNC, all set aside more funds during the second quarter to cover repurchase requests, Reuters reported.
The government-sponsored enterprises said the increased buyback requests are part of an effort to recover as much money as possible for American taxpayers who have bailed them out to the tune of more than $188 billion. The GSEs so far have repaid about $45 billion, Reuters reported.
Meanwhile, banks say the GSEs are pounding them on minor technical issues, and more buyback requests will force them to originate fewer mortgages in an already highly pressured housing market.
Banks also face losses on loans sold to private investors who feel they should not be left holding the bag on poorly underwritten loans, Reuters reported.
Most of the disputes over bad loans are being worked out on a case-by-case basis, but settlements have earned a bad rap, particularly since the inspector general at the Federal Housing Finance Agency has noted that Freddie’s recent settlement with Bank of America in January probably cost taxpayers billions of dollars. The settlement agreement only covered repurchase requests for loans originated by Countrywide, which Bank of America purchased in 2008.
Fannie and Freddie consistently have argued that banks should take responsibility for having made bad loans and failing to meet regulatory guidelines since the GSEs are the ones bearing the credit risk. Fannie reported Aug. 8 that more than 2 percent of the loans it acquired between 2005 and 2008 have resulted in buyback requests compared to only 0.25 percent for loans made after 2008.
John McDonald, an analyst at Bernstein Research, noted in an Aug. 6 report that repurchase requests rose from $14.3 billion to $17.3 billion in the last quarter at the seven banks he covers. Meanwhile, Fifth Third Bancorp and PNC also have indicated that the GSEs have started requesting files on nonperforming loans, which is generally a precursor to a repurchase request, Reuters reported.
Fannie spokesman Andrew Wilson said the GSE has not changed how it enforces contracts. “What changed was the volume of loans from 2005-2008 that did not meet our standards and therefore must be repurchased by lenders,” he told Reuters.
Freddie Mac told Reuters that the agency tries to work with lenders and gives them the opportunity to produce missing documents, but nevertheless requires them to honor their contracts.
While McDonald said he believed that banks can financially handle the buyback requests, he said they will create a downward push on earnings and net worth for the next few years.
The FHFA is scheduled to announce new repurchase request standards for all new loans by next month. FHFA Acting Director Edward DeMarco said the new requirements would shift review of loans to the time of purchase in order to give banks greater certainty with regard to the likelihood of buybacks.