HowWealthWorks.com

[Suresh]

As Fannie Mae, Freddie Mac, et al. force banks to repurchase delinquent mortgages involving misrepresentations or fraud, banks will increase loss reserves and reduce lending. Reduced bank lending impedes the Federal Reserve's ability to foster money supply growth and to increase money velocity. Money supply growth and increased money velocity are thought to encourage spending -- lack of which is the root cause of economic downturns, according to Keynesians.
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Wall Street Journal: Fannie, Freddie Chase Bad Mortgages
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Stuck with about $300 billion in loans to borrowers at least 90 days behind on payments, Fannie and Freddie have unleashed armies of auditors and other employees to sift through mortgage files for proof of underwriting flaws. The two mortgage-finance companies are flexing their muscles to force banks to repurchase loans found to contain improper documentation about a borrower's income or outright lies.

The result: Freddie Mac required lenders to buy back $2.7 billion of loans in the first nine months of 2009, a 125% jump from $1.2 billion a year earlier. Fannie Mae won't disclose its figure, but trade publication Inside Mortgage Finance said Fannie made $4.3 billion in loan-repurchase requests in the first nine months of 2009.
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The biggest losers are likely to be Bank of America Corp., J.P. Morgan Chase & Co. and other mortgage lenders when the housing bubble burst. Such lenders also are being deluged with loans kicked back to them by holders of mortgage-backed securities who uncover deficiencies with loans bundled into the pools. One common example: a borrower who said the loan was for an owner-occupied home but used it for a second house.

Overall, banks repurchased about $14.2 billion in loans from holders of mortgage-backed securities in the first nine months of last year, up from $3.6 billion a year earlier, according to Barclays Capital.
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Forced loan buybacks threaten to "wipe out a significant portion of the [loan] origination profits…made in the last year," said Nicholas Strand, a Barclays analyst.
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In response, lenders are being much more careful about new loans. Average credit scores for loans backed by Fannie and Freddie have climbed to about 760 from 720 two years ago.
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Suresh

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[Suresh]

The more loans that need to be repurchased, the greater the loan loss reserves need to be. The greater the loan loss reserves, the less money available to loan out. Even assuming the availability of creditworthy borrowers, the risk of being forced to repurchase mortgages with shady underwriting means that lenders will raise their lending standards, thereby throwing the credit democratization trend in reverse.
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Wall Street Journal: Repurchased Loans Putting Banks in Hole
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Annual reports filed by major mortgage lenders show big surges in the volume of loans being repurchased in 2009. Wells Fargo said it bought back mortgages with balances of $1.3 billion, triple the 2008 total of $426 million. Losses on bought-back loans doubled to $514 million from $251 million in 2008, according to the San Francisco company.

Bank of America repurchased $1.5 billion of first-lien mortgages that were sold off by the Charlotte, N.C., bank through securitizations but are tied to faulty underwriting, up sharply from $448 million in 2008.

As of Dec. 31, J.P. Morgan had set aside $1.7 billion to meet repurchase claims from investors, a 55% jump from $1.1 billion a year earlier.

Last year, lenders bought back about $20 billion of loans with faulty underwriting, according to Barclays Capital estimates. About half of the total was written off because the loans were delinquent.
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Most mortgages bouncing back to lenders are coming from Fannie Mae and Freddie Mac, which bought or guaranteed the loans but now claim they were made improperly.
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Investors holding mortgages can force lenders to take back the loans if borrowers lied about their income, misstated that the property is their primary residence, relied on a fraudulent home appraisal or provided inadequate documentation, among other reasons.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.

[Suresh]

Reuters: Four banks face big losses on repurchases

The four largest U.S. banks could face as much as $42 billion in losses as they repurchase faulty mortgages from housing finance giants Fannie Mae and Freddie Mac, Fitch Ratings said on Wednesday.
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Under an "extremely adverse scenario," the pool of "at risk" loans for JPMorgan Chase & Co (JPM.N), Citigroup Inc (C.N), Bank of America Corp (BAC.N) and Wells Fargo & Co (WFC.N) could total $175 billion to $180 billion, Fitch said.
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Fannie Mae and Freddie Mac are pushing to recover losses on loans that failed to meet "representations and warranties," which state that loans sold into mortgage bond programs fit strict underwriting requirements.
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Under an "adverse but less likely" scenario where Fannie Mae and Freddie Mac successfully put back 50 percent of bad loans and the banks can still recovery 50 percent of the assets' value, the institutions could lose $42 billion, Fitch said. If the GSEs put back 25 percent of the loans, the expected loss could be $17 billion, it said.

Fitch said a more moderate case is the most likely outcome. Losses for banks if the GSEs put back 35 percent of loans would be about $27 billion, it said.
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Suresh

Please feel free to agree with or critique the article excerpts and our comments. Also, please post excerpts from current articles that you've read and which may help all of us get a more complete macroeconomic big picture.