US Banks See Rising Investor-Refund Demands

Wednesday, 19 Oct 2011 01:49 PM

 

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Bank of America Corp. and JPMorgan Chase & Co. reported more demands from investors to repurchase faulty mortgages made after 2008, when the banks said they upgraded their standards to curb defaults.

Claims from investors for loans originated in 2009 or later more than tripled to $153 million from a year earlier for New York-based JPMorgan, the biggest U.S. bank by assets, and almost tripled to $164 million for Bank of America, according to their third-quarter reports. The firms also said claims increased for loans made in 2005, before the housing bubble peaked.

The demands may signal that Fannie Mae and Freddie Mac, the government-back mortgage finance companies, are becoming more aggressive in their quest for refunds as bad home loans spread to more recent years. Regulators have blamed record defaults and foreclosures on lax underwriting from 2004 through most of 2008. Lenders have said they’ve tightened standards since then.

“This is really surprising,” said Chris Gamaitoni, a mortgage and banking analyst at Compass Point Research and Trading LLC, adding that banks have been telling investors that delinquencies weren’t as bad for loans originated after the bubble years. “Maybe the banks didn’t really tighten until 2010,” Gamaitoni said.

The five largest mortgage lenders have absorbed more than $66 billion of costs tied to repurchases, litigation, foreclosure problems and other errors on faulty mortgages since 2007. Investors who buy the loans are entitled to ask for refunds or compensation if they find missing or inaccurate data on home values or the borrower’s income.

Biggest Claims

Fannie Mae and Freddie Mac have been among the biggest claimants, while Charlotte, North Carolina-based Bank of America has suffered the most damage, committing about $40 billion for refunds, litigation and foreclosures, according to data compiled by Bloomberg.

Bank of America reported repurchase demands for post-2008 loans jumped to $164 million in the third quarter from $158 million in the second and $56 million a year earlier. Repurchase demands on its 2005 loans declined from $957 million in the fourth quarter of last year to $431 million in the second quarter, then rose to $668 million in the third quarter.

“Some of this is simply driven by the ‘seasoning’ of claim volume as time passes, for the post-2008 volumes, and not an indication of underwriting,” said Jerry Dubrowski, a Bank of America spokesman. “Keep in mind the numbers are still at relatively low levels and are not necessarily going to result in a repurchase.”

BofA’s Reaction

In its 2010 annual financial report, Bank of America said changes made in operations and underwriting “reduced our exposure after 2008.”

Repurchase requests and resolutions involving Fannie Mae and Freddie Mac have “become increasingly inconsistent with our interpretation of our contractual obligations,” Bank of America said yesterday in a slide presentation accompanying its third- quarter earnings report.

Chief Financial Officer Bruce Thompson told reporters on a conference call the bank has seen “some stuff come over the wall that’s older than what we historically have seen.”

JPMorgan said it received demands in the third quarter for $153 million of faulty mortgages made after 2008, up from $89 million in the second quarter and $46 million in the third quarter of last year. For the 2005 vintage, repurchase demands rose to $200 million in the third quarter from $67 million a year earlier.

Credit Performance

The bank’s annual report said that demands against loans issued before 2005 and after 2008 hadn’t been significant due to “the comparatively favorable credit performance of these vintages and to the enhanced underwriting and loan-qualification standards implemented progressively during 2007 and 2008.” Thomas Kelly, a JPMorgan spokesman, declined to comment.

Wells Fargo & Co., the nation’s biggest home lender, didn’t disclose year-by-year data. The San Francisco-based company said in its third-quarter report that repurchase demands on loans made from 2006 through 2008 rose due to requests from Fannie Mae and that “newer vintage demands continued to emerge.”

Ancel Martinez, a Wells Fargo spokesman, declined to comment on whether the statement signals an increase in demands.

The housing-finance companies have increased repurchase demands on loans that are still current as well as those in default, said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication.

Taxpayer Interest

“That is very, very unusual,” Cecala said. “My understanding is that the biggest reason for the demands on the performing loans is problems with the appraisals.”

Government-run housing-finance companies, which were bailed out and seized during the financial crisis, have said they’re acting to protect taxpayers.

“Freddie Mac’s focus on loan quality is more important than ever since we are in conservatorship, and taxpayers shouldn’t have to pay for losses related to the sale of bad loans to Freddie Mac,” said Douglas Duvall, a spokesman for the McLean, Virginia-based firm.

Fannie Mae defended its practice of seeking the repurchase of performing loans as well as those in default.

“All lenders agree to sell us loans that meet our requirements,” Amy Bonitatibus, a spokeswoman for Washington- based Fannie Mae, said in an e-mailed statement. “When a lender fails to comply with this obligation, whether a loan is performing or not, we will pursue repurchase or other options.”

More Rigorous Reviews

Last month the inspector general for the Federal Housing Finance Agency, the regulator of and conservator for Freddie Mac and Fannie Mae, criticized Freddie Mac for agreeing to a settlement of repurchase claims earlier this year with Bank of America without having thoroughly sampled older mortgages for faults. The inspector general, Steve Linick, encouraged the housing companies to conduct more rigorous reviews and increase recoveries for taxpayers.

“The level of fear around the lenders I talk to about getting these loans right is just unbelievable,” said Christine Clifford, vice president of Access Mortgage Research & Consulting Inc. in Columbia, Maryland. “There were so many mistakes made that we’re swinging from the extreme of not dotting any I’s or crossing any T’s to having eight people check every item.”

© Copyright 2014 Bloomberg News. All rights reserved.

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