JANUARY 28, 2011, 4:04 P.M. ET.

Fannie, Freddie Recouped $20.9 Billion From Banks

By NICK TIMIRAOS

Fannie Mae and Freddie Mac received $20.9 billion over about three years from U.S. banks it forced to buy back shoddy mortgages, according to the Financial Crisis Inquiry Commission.

The commission's report, released Thursday, provides the most detailed public accounting to date of the efforts by the government-controlled mortgage-finance giants to recoup losses by forcing banks to buy back loans that don't meet the company's underwriting guidelines.

From 2007 through Aug. 31, 2010, Fannie and Freddie asked banks to buy back nearly 167,000 loans valued at $34.8 billion, according to the report. Fannie received $11.8 billion from banks, while Freddie received $9.1 billion. The report said the sums received were notable because they represent about one-eighth of the total credit losses absorbed by the firms since 2008.

Fannie and Freddie buy loans from banks and sell them to investors as securities, providing guarantees to make investors whole if borrowers default. Banks agree to certain loan-sale guidelines when they sell mortgages to the firms, and they are obligated to buy back loans that don't meet those guidelines. One of the most common problems: loans that were supposed to be for owner-occupied housing but were actually used for investment properties.

Earlier
Report Details Wall Street Crisis
See selections from the FCIC report
.When defaults were low, repurchases were viewed as a routine cost of doing business with the mortgage giants. But as foreclosures have mounted, Fannie and Freddie have stepped up efforts to inspect defaulted loans and force banks to buy those found ineligible for sale. That has contributed to the swelling costs of buybacks.

Banks have resisted some put-back efforts by Fannie and Freddie, hiring loan auditors of their own to challenge alleged breaches of guidelines or to argue that they weren't responsible for a default. Analysts at Keefe, Bruyette & Woods estimate that industry losses on buy-backs from Fannie and Freddie could ultimately reach $28 billion.

Lawyers for Fannie and Freddie had asked the commission not to make public the repurchase information, which they considered confidential. Representatives for Fannie and Freddie declined to comment.

Both firms' largest target for loan put-backs has been Bank of America Corp., which had paid $3.1 billion on repurchases to Fannie through Aug. 31. More than 70% of those put-backs were for loans sold by Countrywide Financial Corp., which BofA acquired in 2008. Freddie received payments of $2.1 billion for Countrywide loans and $594 million for loans originated by BofA.

This month, BofA reached a settlement with both firms to resolve additional put-back demands related to Countrywide. The company paid $1.3 billion to Freddie to settle all existing and future buy-back demands, and $1.3 billion to Fannie to cover $2.7 billion in demands as of Sept. 20, 2010.

The Fannie agreement doesn't cover future buy-back demands. Fannie's documents show that Bank of America faces $1 billion in repurchase demands that aren't related to Countrywide. A Bank of America spokesman says that the bank has set aside money for all outstanding and future claims from Fannie and Freddie.

At a Senate hearing last month, a Fannie executive said that the company didn't expect the pace of repurchase demands to slow down. "We're about 40% of the way through the process," said Terry Edwards, an executive vice president.

By contrast, a Freddie executive said that the company was well "past the peak of mortgage put-backs," which he expected would be "declining at a fairly significant rate."

http://online.wsj.com/article/SB1000142 ... 29796.html