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March 21, 2012

Banks Still Battling Bad Loan Buybacks

Banks continue to face rising costs due to the repurchase of bad loans sold to Fannie Mae and Freddie Mac, which together asked banks to buy back $33 billion in loans in 2011, The Wall Street Journal reported March 14.

The requested buyback amount was 10 percent higher than the amount requested in 2010.

Banks typically do not have to pay the full amount of the bad loans. During the second half of 2011, Fannie and Freddie collected $11.1 billion from soured loan repurchases compared to $6.9 billion the first half of the year, the Journal reported.

Buybacks reflect an ongoing struggle over how to cover the costs of bad loans, and with the increase in requests from Fannie and Freddie, the nation’s banks are facing rising costs during a time of soft economic growth, lower interest rates and tighter regulations.

Among banks receiving increased buyback requests is Wells Fargo, which beefed up its repurchase liability to $1.3 billion at the close of 2011, up from $1.2 billion at the end of the third quarter.

Adding to the buyback controversy is Bank of America’s Feb.23 announcement that is would no longer place non-Making Home Affordable Program refinance first-lien residential mortgages into Fannie mortgage-backed securities due to concerns over repurchase requests. A year ago, Bank of America paid $2.8 billion to settle claims on faulty loans sold to both Fannie and Freddie, the Journal reported.

Fannie and Freddie have withdrawn about a third of their repurchase demands once banks have produced documentation to support the issuance of loans that eventually soured, although Fannie is mostly responsible for the recent uptick in requests.

Loans sold between 2006 and 2008 — the height of the financial crisis — have accounted for a total $66 billion in buyback requests; Countrywide Financial, which is now owned by Bank of America, accounted for almost a quarter of those buyback requests. Wells Fargo was requested to buyback $7.1 billion in loans from that period, according to the Journal, while JPMorgan Chase was requested to buyback $6.7 billion, Bank of American $5.1 billion and Citigroup $3 billion.

Fannie and Freddie have tightened their underwriting standards so recent loans are performing better, but banks already face almost $5 billion in repurchase requests for loans sold in 2009 and 2010, and $1 billion in repurchase requests for loans sold in 2011.

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