Banks Resisting Fannie, Freddie Demands to Buy Back Mortgages
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.
About 40 percent of repurchase requests are rescinded after lenders provide additional paperwork, said John A. Courson, chief executive officer of the Mortgage Bankers Association, a Washington trade group.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a lot of stockholder resources, and clearly a lot of Fannie and Freddie resources, to have 40 percent of these things rescinded,” Courson said in an interview.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.”
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.”
“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.”
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.
Fannie Mae and Freddie Mac say the mounting buyback demands are the result of growing delinquencies, not new enforcement.
“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.”
Overall, 33 percent to 39 percent of loans questioned by the GSEs are leading to buybacks
Labels: Debt disaster, Real estate lending