March 14, 2010

Repurchased Loans Putting Banks in Hole


Lenders such as Bank of America Corp., J.P. Morgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. will brave stiff headwinds this year as they face demands to buy back defectively underwritten mortgages.

Annual reports filed by major mortgage lenders show big surges in the volume of loans being repurchased in 2009. Wells Fargo said it bought back mortgages with balances of $1.3 billion, triple the 2008 total of $426 million. Losses on bought-back loans doubled to $514 million from $251 million in 2008, according to the San Francisco company.

[bofa0308] AFP/Getty Images

Bank of America repurchased $1.5 billion of first-lien mortgages that were sold off by the Charlotte, N.C., bank through securitizations but are tied to faulty underwriting, up sharply from $448 million in 2008.

As of Dec. 31, J.P. Morgan had set aside $1.7 billion to meet repurchase claims from investors, a 55% jump from $1.1 billion a year earlier.

Last year, lenders bought back about $20 billion of loans with faulty underwriting, according to Barclays Capital estimates. About half of the total was written off because the loans were delinquent.

The rising tide “is definitely a surprise,” said Ajay Rajadhyaksha, head of U.S. fixed-income and securitized strategy at the Barclays PLC unit. “Most investors haven’t really focused on this issue and are surprised on how much impact this could have, including on earnings.”

Most mortgages bouncing back to lenders are coming from Fannie Mae and Freddie Mac, which bought or guaranteed the loans but now claim they were made improperly. The two mortgage giants, taken over by the U.S. government about 18 months ago, have been revving up their efforts to reject loans that don’t meet standards that are generally known as representations and warranties.

When banks are forced to buy back souring loans, they typically do so at a steep loss, while giving up income they earned in fees from making the loans. In 2009, Freddie Mac returned about $4.1 billion of single-family mortgages to lenders, more than double the $1.8 billion in 2008, according to the company’s annual report.

“Borrowers, the mortgage industry and taxpayers are all well served when Fannie Mae exercises its rights to require lenders to repurchase loans that do not meet Fannie Mae’s underwriting standards,” Terry Edwards, an executive vice president at Fannie Mae, said in a statement.

Some lenders are resisting. “We continue to fight the battle at a loan-by-loan level,” Barbara Desoer, president of Bank of America’s mortgage business, said last month.

As of Dec. 31, nearly 30% of Freddie Mac’s unfulfilled repurchase requests were outstanding for more than 90 days.

J.P. Morgan said last month that repurchase demand “remains elevated” at $1 billion each quarter. Loan-repurchase claims are resolved through a review process with Fannie Mae and Freddie Mac within two to three years, the bank said.

Investors holding mortgages can force lenders to take back the loans if borrowers lied about their income, misstated that the property is their primary residence, relied on a fraudulent home appraisal or provided inadequate documentation, among other reasons.

“Mortgage repurchases should have a considerable impact on banks,” Mr. Rajadhyaksha said.

As of Dec. 31, Wells Fargo set aside $1 billion to cover potential loan repurchases, up 70% from $589 million a year earlier. Citigroup’s repurchase reserve held $482 million at the end of 2009, up from $75 million a year earlier, according to the company’s annual report.

A Citigroup spokesman declined to comment.

—Marshall Eckblad contributed to this article.


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