Interesting piece of news from Fitch Ratings via Bloomberg Businessweek yesterday. According to Fitch, Bank of America, Citigroup, JP Morgan Chase, and Wells Fargo may be on the hook for up to $175 billion worth of bad loans they sold to Fannie Mae and Freddie Mac.
The report states that Fannie Mae and Freddie Mac collectively hold about $355 billion worth of bad mortgages on their balance sheets. Fitch states that it is “conceivable” that as much as $175 billion of the mortgages may be eligible for repurchase.
Fannie Mae and Freddie Mac are the largest purchasers of mortgages in the United States. They own or back more than 95 percent of U.S. mortgages. When Fannie or Freddie purchase mortgages from loan originators and lenders, they insert buyback clauses in the contracts that stipulate if the mortgage defaults and turns out to be inadequately underwritten or documented, the originator or lender can be forced to repurchase the mortgage.
A quote from the article:
“Fitch is concerned that a more aggressive request for loan repurchases could potentially expose banks with large mortgage origination operations to future losses that have not been previously incorporated into Fitch’s existing exposures, and effectively into current ratings”.
As this story develops I will post further updates here.
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