Upshot for Mortgage Company That Issues Defective Loans
Any mortgage company found to have issued defective home loans is being forced by mortgage financiers Fannie Mae and Freddie Mac to repurchase the loans.
For the period from January to September this year, Freddie Mac has returned around $2.7 billion worth of single-family mortgage loans to lenders, more than twice the $1.2 billion worth of loans returned last year. Freddie and Fannie do not directly provide home loans, but they purchase or guarantee home loans from lenders.
During the same period, the number of real-estate owned properties in Fannie Mae books increased to 98,428 units, an increase from the 94,652 units repossessed after foreclosure in 2008. Last year, Fannie Mae returned about one-fourth of these REO to lenders and expects to return about the same percentage to lenders this year and next year.
Major lenders, such as Bank of America, Wells Fargo, Citigroup and J.P. Morgan Chase, have been rejecting some of the loans or properties being returned by Fannie and Freddie because most of the mortgages were provided to creditworthy borrowers and most were fixed-rate 30-year mortgages, but Freddie and Fannie insist that every mortgage company needs to re-examine its underwriting practices and the extensive guidelines provided by Freddie and Fannie Mae.
Michael Cosgrove, spokesperson for Freddie Mac, said that Freddie has been looking for ways to reduce potential losses and has been examining guaranteed loans more thoroughly.
According to Inside Mortgage Finance, 3 million mortgage loans were in default or in foreclosure as of September 30, which is equivalent to $750 billion, assuming an average loan amount of $250,000.
Maria Brewster, head of the Centralized Repurchase Team of Fannie Mae, explained that the decision of Fannie to return poorly underwritten loans will force lenders to become accountable for their lending practices and will spur them to clean up their operations. Brewster also added that Fannie and Freddie, which are controlled by the federal government and funded by taxpayers, should not be made to pay for the mistakes of lenders.
In the third quarter, Wells Fargo increased its reserves for loan repurchase by $146 million in anticipation of more defaults and repurchase demands. Similarly, J.P. Morgan allocated $1.1 billion to meet repurchase demands from investors.
Bank of America, meanwhile, stated that it has repurchased $922 million of mortgage loans which were deemed to be faulty for the period January to September.
One mortgage company that failed due to inadequate reserves for faulty loan repurchase was New Century Financial. It collapsed when it overstated its financial condition and failed to repurchase faulty loans.
