Over the past three years seller/servicers have been slapped with upwards of $40 billion in loan buyback claims from Fannie Mae and Freddie Mac, and although these “requests to repurchase” are beginning to wane, the crisis still has some legs to it.
“I don’t think the buyback problems the industry has faced are over by any means,” said Chuck Klein, managing partner of Mortgage Banking Solutions, Woodway, Texas. “Some of my clients are still getting a buyback request a day.”
Investment banking and mortgage advisors told National Mortgage News that in some cases the GSEs are asking for buyback damages on loans originated upwards of five years ago.
For now, it appears that Fannie is continuing to have a tougher time with buybacks than Freddie, and for one obvious reason: for most of the past decade its largest seller/servicer client was Countrywide Financial Corp., which had a “strategic alliance” agreement with the GSE.
Under such an arrangement, a lender agrees to sell a majority of its prime production (and sometimes, its nonprime) to a GSE in exchange for a discount on the guarantee fee it pays and other benefits.
As the housing market boomed from 2003 to 2007 CFC was selling hundreds of billions of dollars in home mortgages (including alt-A loans) to Fannie, while Freddie received a pittance of mortgages from the once-high-flying mortgage banker.
When it was later revealed that CFC had some of the loosest underwriting in the industry, it became a huge problem for Fannie, as opposed to Freddie. (It also might explain why Freddie Mac has returned to profitability while Fannie continues to lose money.)
In the first quarter Fannie reported a 72% spike in loan repurchase requests in the first quarter, a sign that the GSE’s legacy portfolio (CFC) is continuing to deteriorate in quality.
In its recent earnings statement, Fannie said outstanding loan repurchase requests totaled $8.6 billion as of March 31, up from $5 billion in the fourth quarter.
"We expect that the amount of our outstanding requests could remain high in 2011," the GSE said in a securities filing.
In 4Q Fannie resolved $3.9 billion of buyback claims with Bank of America, with that lender agreeing to pay the GSE $1.3 billion. (Industry sources say that despite the settlement, Fannie is not done asking B of A for damages from faulty loans that CFC sold to the GSE.)
Meanwhile, over at Freddie Mac, loan repurchase requests have been declining for three consecutive quarters. In the first quarter Freddie reported $3.4 billion of outstanding buyback requests. Back in the second quarter of 2010 requests were almost double at $6.2 billion.
During the first quarter, Freddie said it “recovered amounts that covered losses with respect to $1.2 billion of UPB of loans associated with our repurchase requests.”
Fannie reported that it received compensation on buyback requests tied to $1.6 billion of mortgages. Both GSEs generally do not say how much they recovered unless a seller/servicer reveals such information in a SEC filing.
