Banks refusing to buyback fraudulent mortgages from Freddie and Fannie

June 8, 2010 by · Leave a Comment
Filed under: Real Estate News 

NY Times has posted a scathing piece about how banks are truly dragging their feet when it comes to honoring the buyback agreements the banks entered in when they sold these loans to the GSE’s (Government Sponsored Enterprises).  According to the article (I agree), they are holding these mortgages on their balance-sheets are very inflated values but when they are finally bought back by the banks, the loans are written down by a substantial amount.

It is disgusting that they helped fuel the sub-prime mortgage crisis and now they are balking at re-purchasing their obviously shame loans that they never even bothered to verify income or job status.  The banks should be forced to honor these agreements and if they fall below their tier 1 capital requirements, they should be forced to raise more or go into receivership.  This is the fair and just course of action.  Anything less would be going in the direction of less transparency and more corruption of our financial system.  There are 3 things that will need to happen to all this debt: 1. Paid off  2. Restructured 3.  Defaulted; hiding losses and pretending they are not there is not an option.

NY Times – Fannie and Freddie helped grease the nation’s housing machinery before and during the boom years, scooping up loans from all corners of the country. The more of these that Fannie and Freddie bought, the easier it was for banks to write new mortgages.

To protect themselves from getting piles of garbage loans shoveled their way when they buy mortgages, Fannie and Freddie require lenders or loan servicers to sign contracts requiring those firms to repurchase loans that don’t meet certain standards relating to borrower incomes, job status or assets. Loans that were extended fraudulently, or deemed to have been predatory, are also candidates for buybacks.

Surprise, surprise: banks don’t want to repurchase these loans. So when Fannie or Freddie identify problem mortgages and request repayment, a battle royal begins. Banks may argue, for example, that the repayment requests have flaws of their own.

But for us as taxpayers, watching this battle from the sidelines, one growing concern is how aggressively Fannie and Freddie will pursue their requests. If banks refuse to buy back flawed loans, taxpayers will have to cover more of the losses.


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