Banks shun bad Fannie, Freddie costs

WASHINGTON - The nation's largest banks have an obligation to pay some of the cost for bailing out mortgage buyers Fannie Mae and Freddie Mac because they sold them bad mortgages, a government regulator said Wednesday.

Edward DeMarco, the acting director for the Federal Housing Finance Agency, said the banks this summer have refused to take back $11 billion in bad loans sold to the two government-controlled companies, in written testimony submitted for a House subcommittee hearing Wednesday. One-third of those requests have been outstanding for at least three months.

DeMarco said the banks had a legal obligation to buy back the loans and called the delays "a significant concern." He said the government may take new steps to force those buybacks if "discussions do not yield reasonable outcomes soon."

Fannie and Freddie buy mortgages and package them into securities with a guarantee against default. The two mortgage giants nearly collapsed two years ago when the housing market went bust. The government stepped in to rescue them and it has cost taxpayers about $148 billion so far.

Fannie and Freddie have a legal right to return bad loans, especially if they discover fraudulent statements on applications. Any money they recover offsets their losses.

The amount in question is a small fraction of the total government rescue, said Ed Mills, financial-policy analyst at FBR Capital Markets.

Still, lenders say Fannie and Freddie are trying to return too many loans. They are pushing back some loans where it's unclear fraud was committed, the lenders say.

Wall Street has worried that the costs of bailing out Fannie and Freddie could get pushed back on big banks. Fitch Ratings said in a report last month that the four largest U.S. banks could book losses of up to $42 billion if Fannie and Freddie force them to take back troubled mortgages they made. It estimated that JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. could record $17 billion in losses if they repurchase a quarter of the mortgage giants' seriously delinquent loans.

by Alan Zibel Associated Press Sept. 16, 2010 12:00 AM


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Banks shun bad Fannie, Freddie costs