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TheStreet Open House

Feds May Sue Banks Over Buybacks

Editor's note: Last month, TheStreet's Lauren Tara LaCapra reported the following story that foretold many of the issues that Bank of America is contending with today



NEW YORK ( TheStreet) -- Top regulators appear to have lost patience with banks' refusal to buy back billions of dollars' worth of mortgage loans and are threatening to escalate the matter further if a solution can't be reached.

During testimony before the House Financial Services Committee on Wednesday, Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), said that while housing authorities have been pushing lenders hard, their resistance has been tough to get around.

"There are ongoing discussions between the enterprises and lenders to reach a workable solution," said DeMarco. "If these discussions do not yield reasonable outcomes soon, FHFA may look to its supervisory and conservatorship authorities provided under the statute to resolve the situation."

Asked by TheStreet what specific actions the FHFA plans to take against lenders, DeMarco provided the following statement via a spokeswoman: "Whatever FHFA would do depends on the facts and circumstances of each particular situation. It remains our hope that the servicers and Fannie Mae and Freddie Mac will work this out in normal order."

During his testimony, though, DeMarco pointed out that three Federal Home Loan Banks have filed court complaints in Pittsburgh, Seattle and San Francisco, alleging "fraud, misrepresentation, and violations of state and federal securities laws" related to certain private-label mortgage-backed securities purchases. The FHLBs are demanding that loan originators buy back $20 billion worth of related securities.

It's possible that top lenders that are refusing to buy back mortgages from Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) could face legal action as well.

Lenders and investors sell mortgage-backed securities to Fannie and Freddie under contracts that include "representations and warranties" about underwriting terms. If any of those terms are breached, Fannie and Freddie, which are overseen by the FHFA, can request that lenders repurchase the debt.

As taxpayer losses related to Fannie and Freddie continue to climb, federal housing authorities have been scrutinizing loan documents to hand back more souring debt to top lenders and servicers. Last year, banks repurchased $8.7 billion worth of single-family mortgages and volumes have been slightly higher this year to date.

Yet there are $4.7 billion in outstanding requests that have not been accepted; more than one-third have been outstanding for more over 90 days.

Buybacks have become an increasing worry for bank investors, since lenders have built up tens of billions of dollars' worth of reserves against potential repurchases. The industry has complained that many of the buyback requests stem from minor issues with paperwork, rather than significant underwriting flaws. In an effort to ease investor concerns, they also point out that, as a result, many of the repurchased mortgages are still performing.

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