Mortgage Repurchase Requests on Rise

NEW YORK (TheStreet) -- Banks are facing a wave of requests to repurchase troubled mortgage loans in yet another ripple effect from the housing bust.

The pushback from the parties now stuck with the loans-- namely Fannie Mae(FNM) and Freddie Mac(FRE) -- began in earnest in the second half of 2009. With delinquencies and foreclosures still running at record highs, there's no sign the demands will begin to abate anytime soon.

Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM), SunTrust Banks(STI) and First Horizon(FHN), are among the institutions that have pointed to increasing requests for added documentation on mortgage loans they've underwritten and since sold or securitized, according to recent regulatory filings and investor presentations.

Such requests are precursors to kicking the loans back to the banks if problems are found and it's determined the loans should never have been approved in the first place.

While repurchases are typically requested of defaulted or seriously delinquent loans, Fannie and Freddie are scrutinizing loans much more closely these days as they try to shore up their own loan books in the face of outsized losses in the wake of the recession. Not all of the loans being requested for repurchase are nonperforming -- some just look iffy -- all are single-family residential loans with vast majority of those currently being questioned classified as prime loans, observers say.

Last year, banks made $30.87 billion in mortgage loan repurchases vs. $7.34 billion in 2008, according to trade publication Inside Mortgage Finance. Eighty-four percent of the repurchases came in the second half of the year, according to the Bethesda, Md.-based trade publication.

In addition to Fannie and Freddie, the pushback is being fueled by demands from private mortgage insurers and monoline financial guarantors including MGIC Investment (MGIC) and Radian (RDN). These companies are looking to limit their own losses from defaulted mortgages through loan put-backs to originators and also by denying claims on mortgage insurance.

Moody's Investor Service estimated in a December report that the mortgage insurers had rescinded roughly $6 billion of submitted claims since January 2008 and could potentially rescind an additional $2 to $4 billion of claims in the next few years. Additionally, financial guarantors have recorded more than $4 billion of credits for loan put-backs, Moody's said.