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 (
) -- 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."
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
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.
Top executives from
Bank of America
- the country's top three mortgage servicers - addressed the issue at a financial services conference earlier in the week.
Bank of America CEO Brian Moynihan called the process "very unpleasant," since his firm has incurred $8 billion in related costs, half of which stems from write-offs and the other half in reserves. Despite "elevated" charge-off levels, he said the costs "remain manageable in the context of our company," which has a $2.3 trillion balance sheet and reduced overall reserves last quarter.
In a nod to the increased repurchase pressure, JPMorgan Chase's Jamie Dimon simply said: "Heightened alert."
His firm has less exposure to buyback requests, facing about $1 billion per quarter, with roughly $2 billion in reserve for future requests. Dimon says JPMorgan was aggressive in tackling the issue early and noted that some requests are based on "inaccurate" information, rather than significant underwriting flaws. As a result, JPMorgan isn't facing "full losses" on the repurchases, but Dimon expects the requests to carry on for an extended period of time.
"I think that will continue for the rest of this year, next year and maybe a little bit longer," said Dimon. "Some people think it won't go that long because we went through the vintages; it won't last that long. I think there's going to be a little bit more of a lag for a whole bunch of reasons in there, but ... I don't know if that is going to be 2011, 2012, 2013."
Wells Fargo CFO Howard Atkins had the most cheerful outlook on the reps and warranties issue. He noted that the bank has always had an "originate to sell" model, so its underwriting standards were better than others - though he didn't address requests from Wachovia's legacy division, which had much more lenient standards.
Still, Atkins noted that requests actually declined last quarter for Wells Fargo, which is the No. 2 servicer behind Bank of America. At June 30, the firm had just $1.4 billion in reserve against future requests. He asserted that investors "simply don't put back good loans" and that "not all delinquent loans are eligible for put backs," unless there is a breach of contract.
"This is not a new issue for the industry and it's certainly not a new issue for Wells Fargo," said Atkins. "We have a long history of working with the GSEs and a long history at estimating reserves necessary to support expected costs from put backs...We've been in the business long enough to understand that the reps of warrantee documentation needs to be held to very high standards of completeness."
Nonetheless, DeMarco indicated many of the problems stem from "the largest financial institutions in the United States," a veiled reference to those big three mortgage servicers, as well as
, which didn't present at the Barclays conference this week. Taxpayers have had to pony up $148 billion in funds to cover Fannie and Freddie losses so far. Under a "worst case" scenario, the two entities' conservatorship may end up costing the federal government $400 billion.
It's unclear what the next immediate step will be in the FHFA's effort to get loan originators to share in Fannie and Freddie's losses.. But considering the FHLBs' fraud allegations, and the FHFA's aggressive tone, banks that continue to refuse repurchase requests may have a day in court, too.
"Lenders are obligated by the representations and warranties they made to the enterprises to repurchase loans that did not meet contractual selling requirements," said DeMarco. "Although the enterprises have made progress in enforcing lenders' representation and warranty obligations, outstanding repurchase requests continue to be of concern to FHFA."
--Written by Lauren Tara LaCapra in New York.
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