Fannie Mae Could Force Mortgage Buybacks of Up to $30b

There was a good article on Bloomberg.com yesterday by Jody Shenn that says that Fannie Mae and Freddie Mac may be able to force mortgage sellers to buy back $30 billion worth of bad loans they were sold before the real estate crash.

According to the article, the Federal Housing Finance Agency (FHFA) issued 64 subpoenas for underwriting and other documentation for mortgage securities purchased by Fannie Mae or Freddie Mac.  FHFA is attempting to discover if there was shoddy underwriting or any other issues with the securities that could trigger buyback clauses in their sales contracts.  When a mortgage held by Fannie or Freddie goes bad, they review the file and may force the seller to buy back the mortgages if documentation or underwriting is lacking.

In the first quarter of 2010, Fannie and Freddie forced lenders to buyback $3.1 billion worth of bad mortgage loans.  A key quote from the article:

Almost 38 percent of subprime mortgages contained in non- agency bonds are at least 60 days late, in foreclosure or already have been turned into seized property, according to Bloomberg data, which doesn’t cover liquidated debt. For loans deemed Alt-A because they fell between prime and subprime in terms of expected defaults, the figure totals almost 29 percent.

“With what’s happened in the mortgage sector, we realize there was a great deal of fraud involved,” William Sidford, a senior vice president at AllianceBernstein LP, which manages almost $200 billion in fixed-income assets, said July 15 at the Securities Industry and Financial Markets Association conference in New York. “That being said, investors aren’t in a position to enforce the claims on those reps and warranties, rather we’re relying on the trustees and servicers to take action for us.”

Even if Fannie or Freddie are able to force some loan buybacks, it will likely be a drop in the bucket compared to the amount of money taxpayers have poured into the two companies.  At this point the tab for the bailout of the two mortgage giants is close to $150 billion, and some believe the total will end up between $400 billion and $1 trillion before all is said and done.  Even so, it is nice to know that some of the purveyors of bad mortgages may be forced to pay for some of the junk they effectively pawned off on U.S. taxpayers.