About 50 percent of the loans held by ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com come from the nation's four largest banks Ã¢â‚¬" ""Bank of America"":http://www.bankofamerica.com, ""JPMorgan Chase"":http://www.jpmorganchase.com, ""Wells Fargo"":http://www.wellsfargo.com, and ""Citi"":http://www.citigroup.com.[IMAGE]
Lately, the GSEs have become more aggressive in forcing originators to buy back bad loans. Based on Fannie and Freddie's current ""distressed"" numbers (a combined $354 billion in delinquent mortgages and REOs), ""Fitch Ratings"":http://www.fitchratings.com estimates that the big four could be on the hook to repurchase as much as $180 billion in nonperforming assets. This, of course, would be the worst-case scenario.
The ratings agency said, ""Fitch anticipates that a focal point of repurchase requests will be reduced documentation loans (sometimes known as Alt-A loans). 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.""
In Fitch's worst-case scenario, the buybacks could result in a combined loss for the nation's top four lenders of between $17 billion and $42 billion. The agency notes, though, that realized losses could be lowered, dependent on the banks' ability to cure loan deficiencies.[COLUMN_BREAK]
Fitch says historically, purchasers of mortgages or mortgage-backed securities (MBS), such as Fannie and Freddie, have been Ã¢â‚¬Å“fairly judiciousÃ¢â‚¬Â in pursuing originators to buy back troubled loans or foreclosed properties.
Prior to the beginning of the mortgage crisis, the ratings agency explained, losses were very manageable and the housing GSEs used to compete actively against one another to gain market share from the major bank originators. As a result, they likely weighed the costs and benefits of exercising their repurchase rights against originators with whom they had maintained long-standing relationships.
That stance, though, has changed now. To some extent, this is expected given the significantly larger volume of troubled mortgages sitting on the GSE's books, Fitch says. And major banks have acknowledged this development and have increased their reserves to cover an increase in requests for deficient loan repurchases.
Based on data through the second quarter of 2010, Fitch estimates the four largest U.S. banks have received pending repurchase requests totaling $19.1 billion, with $10.7 billion coming directly from the GSEs. To date, the big four have set aside $8.3 billion in buyback reserves, according to the ratings agency.
Fitch says it is undertaking a review to assess whether these increased reserves are just a part of the flood of current troubled mortgages or whether investors, such as the GSEs, have expanded their interpretation of what constitutes a mortgage that would be eligible for repurchase under existing warranties.
Ã¢â‚¬Å“This concernÃ¢â‚¬Â¦is not isolated to only the four largest banks. Any bank or other entity that has been actively engaged in mortgage lending could feel the impact,Ã¢â‚¬Â Fitch said in its report.