Analysis: Fannie, Freddie may have edge in mortgage buybacks

By Jonathan Stempel

NEW YORK (BestGrowthStock) – Fannie Mae and Freddie Mac, the U.S. housing finance giants, stand a good chance of recouping billions of dollars of losses on bad mortgages, but private investors face prolonged legal battles that most will not be able to win.

The question of forcing banks to buy back mortgage securities, known as “putbacks,” has lingered for months. But it recently gained a new notoriety after revelations that major lenders and servicers lost, botched or perhaps fraudulently submitted thousands of documents in their rush to foreclose.

Any investor lawsuit seeking to force banks to repurchase mortgage securities may at best be an uphill fight, certainly given their lack of success in the courts so far.

But analysts said Fannie and Freddie, may have more flexibility — and more weight to throw around.

Fannie Mae and Freddie Mac, which were taken over by the U.S. government two years ago, support the housing market by buying mortgages from banks, in order to free them to make new loans.

“Fannie and Freddie have a lot more leverage,” said Guy Cecala, publisher of the newsletter Inside Mortgage Finance. “If a lender doesn’t buy back their loans, Fannie and Freddie could decide they don’t want their business. Given that they represent two-thirds of the mortgage market, that would be a big blow. Private investors do not have that leverage.”

Analysts said Fannie Mae and Freddie Mac also need demonstrate lesser harm, and not necessarily win support from other aggrieved bondholders, before making their claims.

While issues over foreclosures involving shoddy documents are separate from putbacks, unhappy investors including pension funds and hedge funds believe similar carelessness or recklessness may also have pervaded the underlying loans, both in the underwriting standards and in the underlying paperwork. This, they believe, taint the mortgage securities they own.

In one case, a group of investors including the Federal Reserve Bank of New York and asset managers BlackRock Inc and Pacific Investment Management Co is pressing Bank of America Corp to buy back some of $47 billion of mortgages assembled mostly by Countrywide Financial Corp. Bank of America acquired Countrywide in July 2008.


Analysts estimate the actual cost of mortgage securities buybacks could ultimately reach tens of billions of dollars.

Last week, JPMorgan analyst Edward Reardon estimated industry losses of $55 billion to $120 billion from mortgage buybacks. Mike Mayo of Credit Agricole Securities was more sanguine, saying losses could be just $20 billion.

Fitch Ratings in August estimated Fannie and Freddie could recover up to $42 billion in mortgage buybacks from the four biggest banks alone.

The Federal Housing Finance Agency, the regulator that oversees Fannie and Freddie, has hired the prominent law firm Quinn Emanuel Urquhart & Sullivan LLP to provide advice.

In July the FHFA said it issued 64 subpoenas for documents on mortgage securities assembled by other companies. Fannie and Freddie could use such documents to determine whether the loans underlying bonds they bought conformed to their guidelines.

“Buybacks should be a big deal for Fannie and Freddie, given that they should be acting in the public interest,” said William Black, associate professor of economics and law at the University of Missouri-Kansas City who is also a former deputy director of the Federal Home Loan Banks. “It would greatly reduce losses to the taxpayer.”

Fannie and Freddie through June had lost a combined $208 billion since the end of 2007.

They have received $148 billion of government injections, and the FHFA on Thursday said they may need up to another $215 billion by 2013.

In a report last week, Reardon said Fannie, Freddie and another agency, Ginnie Mae, may have the greatest success in litigating for buybacks.

He said this is in part because the agencies need only prove their loan guidelines were breached while other investors might need to show that breaches materially reduced the values of loans. Reardon also said an agency need not gather a minimum level of bondholder support before challenging a loan.


Last week, a New York state judge dismissed a class-action lawsuit against Bank of America on behalf of 374 trusts that bought mortgage securities from Countrywide, in part because the plaintiff had not first won required support from 25 percent of the certificate holders.

And in September, a federal judge in Manhattan rejected fraud claims by two trusts suing Countrywide over mortgage securities, saying the complaint failed to allege “more than a sheer possibility” of unlawful activity.

Jess Bressi, a southern California lawyer, said banks may try to force investors to challenge the validity of individual loans underlying their securities, a costly and time-consuming endeavor. Investors may counter by convincing a court to review only a sampling of loans to illustrate broad-based problems.

“These cases will settle — over the majority of them will,” said Bressi, a partner at Luce, Forward, Hamilton & Scripps LLP in Irvine, California.

But maybe not all. Mayo said Bank of America is unlikely to settle with the group that includes BlackRock and the New York Fed, and perhaps “encourage others to pursue this path.”

The four biggest U.S. banks have set aside comparably modest sums to cover mortgage buybacks.

Bank of America raised its reserve for claims in the third quarter to $4.4 billion from $3.94 billion in June.

Meanwhile, JPMorgan Chase & Co’s reserve grew to $3 billion from $2 billion, while Wells Fargo & Co’s fell to $1.33 billion from $1.38 billion. Citigroup Inc’s reserve rose to $952 million from $727 million.

Bank of America Chief Executive Brian Moynihan on Tuesday said investors who feel wronged may not necessarily recover.

“If you think about people who come back and say, ‘I bought a Chevy Vega but I want it to be a Mercedes with a 12-cylinder,’ we’re not putting up with that,” he said on a conference call.

(Reporting by Jonathan Stempel in New York; Additional reporting by Dan Levine in San Francisco, Maria Aspan in New York and Mary Meyase in Bangalore; Editing by Leslie Adler)

Analysis: Fannie, Freddie may have edge in mortgage buybacks