In a move made to look like they’re looking out for taxpayers, Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE:FRE) have finally started doing the job they should have been doing in the first place: checking out the mortgages from major banks like Bank of America (NYSE:BAC), J.P. Morgan (NYSE:JPM) and Wells Fargo (NYSE:WFC), which they guaranteed evidently without proper due diligence.
Maria Brewster who heads up the repurchase unit said this in a Wall Street Journal article: “Because taxpayers are involved, we’re being very vigilant. No taxpayer should have to pay for a business decision that caused a bad loan to be sold to Fannie Mae.”
Fannie and Freddie leaders should have more seriously considered that before what looks like the rubber stamping of just about every group of bundled mortgages presented to the insurers.
So what they’re finally doing in an attempt to lower those numbers is having a large group of their employees and auditors go through the mortgages looking for errors, omissions or things that they can use to force the banks to repurchase the loans they shouldn’t have sent to them in the first place. Again, this is something they should have been doing in the first place, not as an after thought.
The largest lenders will be hit the hardest by this strategy, which forced $2.7 billion in loans to be bought back over the first nine months of 2009 by Freddie Mac, with a total of $4.3 billion repurchases asked for by Fannie alone.
Taking into account all repurchased loans from those holding mortgage-backed securities, banks spent $14.2 billion buying them back in the first nine months of last year.
Concerns are forced repurchases will have a strong, negative impact on the profits generated from loans originated in 2009 by the banks.
While most of the press coverage has been on sub-prime loans over the last couple of years, the problems for the banking industry is with prime loans, which represent close to 90 percent of all mortgages guaranteed by Freddie and Fannie, and these prime loan defaults are starting to soar, making it potentially a much larger threat.
Recent reports from Fannie shows that 5.29 percent of the loans they guaranteed are over 90 days behind on payment as of November, while Freddie says that as of December 3.87 percent of loans are behind by over 90 days.
For Bank of America, they’ve bought back $4.5 billion of loans in general for the first nine months of 2009, while J.P. Morgan bought back $5.3 billion in loans for the year. Data for Wells Fargo – one of the largest mortgage companies in the world – wasn’t available.
In all fairness, the two companies suffered more from their acquisitions of Countrywide Financial Corp. and Washington Mutual Inc. in this area, making the numbers higher than they otherwise would have been.
The good news is the mortgage standards are being raised by the banks in response to the many defaults, while Freddie and Fannie are checking out the underwriting of the mortgages in a way they should have been when accepting the mortgage bundles in the first place.
All of this shows profits in the overall banking sector – especially those with massive exposure to mortgages – will continue to struggle to grow in 2010.
