Banks must help Fannie, Freddie, regulator says

By Alan Zibel
Associated Press / September 16, 2010

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WASHINGTON — The nation’s largest banks have an obligation to pay some of the cost for bailing out mortgage buyers Fannie Mae and Freddie Mac because they sold them bad mortgages, a government regulator said yesterday.

Edward DeMarco, the acting director for the Federal Housing Finance Agency, said the banks this summer have refused to take back $11 billion in bad loans sold to the two government-controlled companies, in written testimony submitted for a House subcommittee hearing yesterday. A third of those requests have been outstanding for at least three months.

DeMarco said the banks have a legal obligation to buy back the loans and called the delays “a significant concern.” He said the government may take new steps to force those buybacks if “discussions do not yield reasonable outcomes soon.”

In an interview with reporters after the hearing, DeMarco declined to give further details on what the government might do next. He said only that “we’re looking for contractual obligations to be fulfilled.”

Fannie and Freddie buy mortgages and package them into securities with a guarantee against default.

The two mortgage giants nearly collapsed two years ago when the housing market went bust. The government stepped in to rescue them, and it has cost taxpayers about $148 billion so far. The rescue is on track to be the most expensive piece of stabilizing the financial system.

Fannie and Freddie have a legal right to return bad loans, especially if they later discover fraudulent statements on applications. Any money they recover offsets their losses.

The amount in question is a small fraction of the total government rescue, said Ed Mills, financial policy analyst at FBR Capital Markets.

Still, lenders say Fannie and Freddie are trying to return too many loans. And in some cases, they are pushing back loans where it’s not clear fraud was committed, the lenders say.

Mortgage industry consultant Brian Chappelle said the requests often apply to loans that met the mortgage buyers’ guidelines at the time.

“The industry believes that the pendulum has swung far beyond what is reasonable,” he said. As a result, he said, lenders are being extremely cautious about making new loans.

Wall Street has worried that the costs of bailing out Fannie and Freddie could get pushed back on big banks. Fitch Ratings said in a report last month that the four largest US banks could book losses of up to $42 billion if Fannie Mae and Freddie Mac force them to take back troubled mortgages they made. It also estimated that JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., and Wells Fargo & Co. could record $17 billion in losses if they repurchase a quarter of the mortgage giants’ seriously delinquent loans.

The leading Democrat on the panel, a House Financial Services subcommittee, indicated the banks bear some responsibility.

“We must begin to think about approaches for recouping taxpayers’ money in the long run,” said Representative Paul Kanjorski. “We found a way to pay for the savings and loan crisis, and we can surely find a way to recover the costs associated with this crisis.”

The Obama administration is working on a plan to restructure the mortgage market and make sure home loans are affordable.