Big Banks May Be Forced to Buy Back Bad Mortgage Loans

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Major U.S. banks are under pressure from government officials, as well as groups of investors and insurers, to repurchase or modify bad mortgage loans they pooled into securities and sold to unwitting buyers.

In the latest effort, a group of investors with roughly $500 billion invested in 2,300 mortgage securities is trying to force the large banks that originated or are now servicing faulty subprime-mortgage loans to repurchase or modify them, The Wall Street Journal reported.

Some investors "had no idea that their money was being invested in mortgage-backed securities," Dallas-based attorney Talcott Franklin told The Journal. "And yet somehow these people are now the ones being punished, and that's just not right."

Many bond and mortgage insurers accuse lenders and banks of sticking them with bad loans flawed by poor underwriting and faulty appraisals.

Federal Home Loan Banks in Pittsburgh, Seattle and San Francisco have sued several banks, in an effort to force them into buying back mortgage-backed bonds. In July, the Federal Housing Finance Agency issued 64 subpoenas to obtain information about loans backing securities sold to mortgage giants Fannie Mae (NYSE: FNMA) and Freddie Mac (NYSE: FRE).

Edward DeMarco, the acting director for the Federal Housing Finance Agency last week said big banks have an obligation to pay some of the cost for bailing out the government-backed mortgage buyers because they sold the bad mortgages.

The banks have refused to take back $11 billion in bad loans, Demarco said in written testimony submitted for a House subcommittee hearing. The government may take new steps to force those buybacks if "discussions do not yield reasonable outcomes soon." 

Wall Street is worried that big banks could be forced to cover the costs of bailing out Fannie and Freddie.  Fitch Ratings Inc. said last month that the four largest U.S. banks – JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC) and Wells Fargo & Co. (NYSE: WFC) – could be on the hook for $42 billion in troubled mortgages they made to Fannie and Freddie.

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

The two mortgage giants nearly collapsed two years ago when the housing market went bust. The government program to rescue them has cost taxpayers about $148 billion. The bailout is the most expensive piece of the effort to stabilize the financial system.

Lenders say Fannie and Freddie are trying to return too many loans and are pushing back loans where it's not clear fraud was committed.

"The industry believes that the pendulum has swung far beyond what is reasonable," mortgage industry consultant Brian Chappelle told the Associated Press, noting that many of theloans met the mortgage buyers' guidelines at the time.

In another case, bond insurer MBIA Inc. (NYSE: MBI) in December sued Credit Suisse Group AG (NYSE ADR: CS) over a $900 million loan pool, a large portion of which MBIA agreed to cover. MBIA said it had relied on Credit Suisse to vet the quality of the loans.

In January, Ambac Assurance Corp., the bond-insurance unit of Ambac Financial Group Inc. (NYSE: ABK), sued a Credit Suisse unit in New York state court, alleging that it made "false and misleading" representations about home-equity lines of credit backing bonds that the insurer guaranteed in 2007.

A Credit Suisse spokesman said the claims are without merit and the bank will defend itself.

How the battle will end up is unclear and will no doubt hinge on contentious negotiations and litigation that could last for years.

The legal actions focus on the contractual duties of lenders known as "representations and warranties," which require them to repurchase faulty loans or modify them so borrowers can keep paying monthly mortgages. Those payments maintain the value for mortgage securities tied to the loans.

If a borrower lied when getting a loan, a bank trustee is responsible for forcing the originating bank to repurchase the loan on behalf of mortgage investors. Trustees enforce warranties made by banks when they sell loans and oversee loan-servicing firms that decide whether to modify the terms of a loan.

As part of the legal process, banks may be forced to disclose confidential information about the loans, including faulty appraisals or lack of documentation.
That data could be used to force banks to repurchase as much as $133 billion in bad home loans, according to Compass Point Research & Trading Inc., a Washington, D.C., boutique investment bank.

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  1. Donna | September 24, 2010

    This article is right on the target.

    Wells Fargo committed prosecutable crime against us. We lost our home. Something is wrong with this picture. Here are the facts.

    1. it is illegal for Wells Fargo to make mortgage loan to us based on hugely inflated appraisal.

    Fact: – Wells Fargo’s fraudulent appraisal valued our home at $718,000
    – Wells Fargo’s own review appraisal valued our home at $475,000
    – Nevada Attorney General’s office suspended the appraiser’s license for committing appraisal fraud on our home.
    – Nevada Appraiser Licensing Board mandated the appraiser to complete appraisal fraud course
    before regaining his real estate appraiser license.
    – Nevada Revised Statue NRS 205.372 states that it’s category C felony to make mortgage loans based on fraudulent appraisal.
    – Cases of Attorney General’s indictments against attorneys, loan brokers for teaming up make
    fraudulent loans to defraud homeowners.

    2. it is illegal for Wells Fargo to wrongfully foreclose our home based on fraudulent appraisal and
    mortgage loan.

    You can find all the facts on our website. http://www.wellsfargomortgagefraud.com

  2. Tom | September 24, 2010

    If the appraisal was fraudulent, then why did you take out the mortgage? Did somebody force you to do it? Was this a refinance or purchase? Did the value of the home have anything to do with your stopping to make the mortgage payments?

  3. gordan finch | September 28, 2010

    You have to remember it is the "Banks" who are the so-called experts, who invented the fraud, that are allowed to defraud you in the first place, and in the second place as experts, destroyed most of the worlds economy.

    There is little difference between Banks and Pawnbrokers, both take your "Money" although Pawnbrokers do have three balls outside their premises- and they dont steal your money.

    When you put "Your money" in your bank account it suddenly becomes the Banks" money, a legal point often not known.

    Just crooks in suits, thats it.

  4. rosalie | January 7, 2011

    im an 86 woman living with dementia and Alzheimer BAC gave me a 30 year mortgage when i was 66 years old. my home when i mortgaged it was appraised at 30000 its now worth 15000. because of my illness and my age i cant make it. i live with my son and a home he pays for, also added on BAC's to take away list.
    where is the underwriter in this. a payoff when im in my 90s. a market that i had nothing to do with falling apart. i live on a retirement. living within my means is forced. banks dont give loans to those on social security anymore.
    they should be forced to buy the mortgage back. would be a bailout to what the citizens of this country should have received for dealing with the control of the power hungry of wall street for so long.

  5. Johnny | May 27, 2012

    My loan was written wrongly to the complete knowlege of the mortgage writer and the inspector, the house was built on two properties but only one was used for the loan and now that my wife left me and I'm in forclosure looking at not much hope of being able to keep my home .

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