Fannie Mae, Freddie Mac Clamping Down on Banks

By Rick Rothacker

Government-owned Fannie Mae and Freddie Mac are stepping up efforts to find bad home loans that they can force mortgage lenders to buy back from them, providing an increasingly bigger headache to banks.

The government-controlled companies are squabbling with banks over who should bear the burden of losses from the housing crunch, in particular loans made between 2005 and 2008, when the market was at its frothiest.

Fannie Mae and Freddie Mac’s efforts will translate to higher mortgage losses for banks in the coming quarters. But the end of the fighting may be in sight. Fannie Mae, the larger of the two finance companies, is more than halfway through its review of loans to try to sell back to banks and is mainly focusing on that four-year period, a source familiar with the matter said.

Fannie Mae and Freddie Mac buy mortgages from banks and bundle the loans into bonds that get sold to investors. The loans are supposed to have met guidelines to be eligible for bundling. The two mortgage giants guarantee the packaged bonds.

Historically, Fannie Mae and Freddie Mac have taken banks at their word when they said loans were eligible. If later there were problems (because the borrower’s income was not properly verified, for example), then Fannie Mae and Freddie Mac could ask banks to buy back the mortgages at face value and absorb any losses.

Those repurchase requests are increasing as Fannie and Freddie apply more scrutiny. Both companies have hired more staff to comb through loans and determine which can be sold back to banks.

In the second quarter, outstanding repurchase requests at Fannie Mae grew by 20 percent to $14.6 billion from the first quarter, according to a filing last week.