Fannie, Freddie Seek To Have Big Lenders Eat Bad Home Loans; Poor Underwriting Drives Mortgage Finance Giants' Recovery Efforts Over Debt Gone Sour

Dow Jones Newswires reports:

• As home loans sour at a rapid clip, mortgage finance giants Fannie Mae and Freddie Mac are aggressively bouncing back defectively underwritten loans to lenders. The result: higher loan-loss reserves for the lenders and new headwind for banks trying to escape the housing downturn.

• For lenders such as Wells Fargo & Co., Bank of America Corp., J.P. Morgan Chase & Co. and Citigroup Inc., which are among the largest sellers of mortgages to Fannie and Freddie, this could mean buying back souring loans at a loss. Banks are already on the hook for mortgages residing on their books. But Fannie and Freddie are seeking to hold them accountable as well for what they say are improperly underwritten mortgages sold to them in the past.(1)

For more, see Headwind For Lenders As Fannie, Freddie Bounce Back Loans.

(1) Reportedly, lenders are also pushing back and refusing some repurchase requests. Moreover, lenders don't have strict disclosure rules for these mortgage buybacks or the reserves to pay for them, so it's difficult for shareholders to estimate the potential exposure of a company, the story states. In most cases, investors holding these loans can force the lender to take the mortgages back, and recover the unpaid principal on them, if they were underwritten improperly. For instance, lenders would have to buy back loans from investors if borrowers lied about their income or misstated that the property is their primary residence, the story states. Other reasons a loan may be put back: a fraudulent home appraisal or inadequate documentation.