Big Banks Face Billions in Home Loan Buybacks

August 19, 2010 No Comments »


The four largest U.S. banks, Wells Fargo, Bank of America, Chase, and Citibank, face up to $180 billion in home loan buybacks from government sponsored entities Fannie Mae and Freddie Mac, according to Fitch Ratings.

“Fitch anticipates that a focal point of repurchase requests will be reduced documentation loans (sometimes known as Alt-A loans),” the company said in a release.

“The actual amount of repurchase requests will ultimately depend on key variables such as quality of the originator’s underwriting, documentation standards, and foreclosure rates, while losses will be a function of “cure” rates and home prices.”

But using a more “moderate loss scenario,” where the put-back rate is 35 percent and the recovery rate drops to 55 percent, Fitch believes losses could total just $27 billion.

These estimates don’t include the risk of buybacks on troubled mortgages in existing private-label mortgage-backed securities, which probably have an even higher rate of soured loans.

“If these investors are successful in putting back asizeable portion of the troubled loans presently in inventory, Fitch believes the existing bank Individual and Issuer Default Ratings (IDR) not already at their Support Floor (i.e. Bank of America and Citigroup) could be susceptible to a downgrade in the future.”

Through the second quarter, Fitch estimates that the top four banks have received pending repurchase requests of $19.1 billion, with $10.7 billion from the main housing GSEs.

Prior to the mortgage crisis, mortgages were originated and quickly re-sold to investors on the secondary market via the originate-to-distribute model.

These loans have reportedly seen higher default rates than loans actually kept on banks’ books, probably because underwriting quality was thrown out the window.

As of June 30, Fannie and Freddie held a combined $354.5 billion in troubled mortgages (delinquent mortgages and real estate owned) on their books.

(photo: BenHusmann)

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