Mortgage lenders are seeking relief from Fannie Mae and Freddie Mac as the government-supported companies force them to buy back more soured debt, said John Courson, president of the industry’s largest trade group.
While his members “certainly understand” their contracts require repurchases of defaulted loans when items such as faulty appraisals, inflated borrower incomes or missing documentation are discovered, the Mortgage Bankers Association has started to “aggressively” push the two companies and their regulator to ease up, he said.
“We’re trying to see if we can’t reach some type of a system that says there is a bright line out there, if this loan has been making payments and defaulted for a reason that is neither fraud nor related to the underwriting of the loan, it shouldn’t be subject to a repurchase,” he said.
Last quarter, the companies forced lenders to repurchase $3.1 billion of loans, up 63 percent from a year earlier, after defaults surged to the highest since the Great Depression, according to regulatory filings. Bank of America Corp. and JPMorgan Chase & Co. are among banks that have reported setting aside money to cover such demands.
Repurchase Requests
Freddie Mac, based in McLean, Virginia, had $4.8 billion of repurchase requests pending as of March 31, up from $3.8 billion on Dec. 31. Washington-based Fannie Mae hasn’t made a similar disclosure.
Repurchases are “triggered when loans are out of compliance with our contractual requirements, per the law,” Brad German, a Freddie Mac spokesman, said in a telephone interview. “Because we are trying to be good stewards of taxpayers’ dollars, it is very important that not one of those dollars goes to loans that should have not been sold to us.”
Corinne Russell, a spokeswoman for the Federal Housing Finance Agency, the companies’ regulator, declined to immediately comment. Janis Smith, a Fannie Mae spokeswoman, didn’t immediately return a telephone message.
The U.S. government seized Fannie Mae and Freddie Mac, which own or guarantee almost $5 trillion of U.S. housing debt, in September 2008, and has guided their actions during their so- called conservatorships. They’ve drawn $145 billion in aid from the Treasury Department.
Tough on Put-backs
The companies are too tough on so-called put-backs, following the Federal Housing Finance Agency’s encouragement to be aggressive, Courson said. If a borrower made on-time payments for two or three years before defaulting, that’s a sign that underwriting quality wasn’t a problem and a lender shouldn’t be forced to take back the loan, he said.
“Lenders are getting repurchase requests on the same loan at multiple times for multiple issues, which shows you they’re going from station one, to station two, to station three” as the companies and their contractors “scrub” loan files looking for errors that weren’t material or never occurred, he said.
Mortgage insurer MGIC Investment Corp. and bond guarantor MBIA Inc. are among companies also overcoming potential losses by denying claims or seeking reimbursement because loans didn’t match lenders’ descriptions. Mortgage insurers have been turning down 20 percent to 25 percent of claims in recent quarters, up from 7 percent historically, according to a December report by Moody’s Investors Service.
Mortgage Insurance
When loan insurers rescind coverage on a Fannie Mae or Freddie Mac mortgage, which requires such protection when loan- to-value ratios exceed 80 percent, lenders typically need to buy back the debt. Repurchases by bigger lenders often prompt banks to try to return loans to the lenders from whom they acquired them before selling them to Fannie Mae or Freddie Mac.
Repurchases will be “an issue for the next 24 to 36 months for all us,” Steven Jacobson, chief executive officer of Madison, Wisconsin-based Fairway Independent Mortgage Corp., said in a May 24 interview at a conference held in New York by the Washington-based Mortgage Bankers Association. The company last year originated more than $3 billion in mortgages. “Any big bank can put any one of us out of business.”
By Jody Shenn
Tags: bank of america, borrowers, business, economy, economy recovery, fannie Mae, financial, mortgage bankers association's, mortgage lenders, stock market, us economy
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