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Bank Stocks Reinfected With Mortgage Putback Worries

NEW YORK ( TheStreet) -- Four years on, banks are still seeing increases in mortgage putback demands that are again pressuring shares following the recent Moody's debt downgrade.

A more aggressive stance on mortgage repurchase demands by Fannie Mae (FNMA) and Freddie Mac (FMCC) -- the two government-sponsored mortgage giants, or GSEs, that were taken under government conservatorship in September 2008 -- is prolonging the mortgage mess for several of the nation's largest lenders, which are taking their time about settling the GSE putbacks.

Freddie Mac
Freddie Mac reported that as of March 31, its outstanding mortgage loan repurchase requests -- based on unpaid principal balances (UPB) -- totaled $3.229 billion, increasing from $2.716 billion at the end of 2011. That's a 19% increase over just three months.

Large mortgage lenders have traditionally preferred to sell newly originated mortgage loans conforming to GSE guidelines as quickly as possible, aiming for a quick profit, while retaining servicing, for which they have been paid an ongoing servicing fee by the GSEs. Freddie reported that as of March 31, Wells Fargo Bank N.A. (the main subsidiary of Wells Fargo (WFC - Get Report)) serviced 26% of the GSE's single-family mortgage loans, while JPMorgan Chase Bank, N.A. (held by JPMorgan Chase (JPM - Get Report)) serviced 12% and Bank of America N.A. (the main banking subsidiary of Bank of America (BAC - Get Report)) serviced 11% of the single-family loans.

Freddie said that "as measured by UPB, approximately 38%... of the repurchase requests outstanding at March 31, 2012... were outstanding for four months or more since issuance of the initial request," which includes repurchase requests for which appeals are pending. The servicers often appeal the repurchase requests and see them cancelled once the GSE receives sufficient documentation to determine that the lender, or the seller/servicer, properly underwrote and serviced the loan.

Freddie also said that as of March 31, $155.8 billion, or 9% of its total single-family mortgage loans were covered by agreements with the seller/servicers, releasing the servicers from "certain repurchase obligations in exchange for one-time cash payments." The Federal Housing Finance Agency, which regulates Freddie and Fannie, in September suspended announced it had "certain future repurchase agreements with seller/servicers concerning their repurchase obligations pending the outcome" of Freddie Mac's review of its loan sampling methodology. Freddie entered no further agreements to release servicer's repurchase obligations through the first quarter.

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