Mortgage paper by the millions has been lately marked with a big fire-red stamp BAD. Or some home loan industry observers prefer to use the equally merciless description TOXIC. There probably are a few other choice words floating in the media about them. Nevertheless, these mortgages in default are a major weight on the books of anyone who holds them - generally portfolio lenders and investors - and that being so, they want to get rid of them, if at all possible.
Fannie Mae and Freddie Mac, the colossal GSEs, which make up a large chunk of the secondary mortgage market, have their fair share of this undesirable material. Their auditors are now quite active in combing through their holdings for home loan provider underwriting mistakes and other problems that would allow them to send them back to the originators. As a rule when Fannie and Freddie purchase mortgages they also enter into a contract with the sellers stipulating the rules of the acquisitions. They've discovered quite a bit of mayhem in their portfolios, which comes as no surprise.
Therefore, as it so happened, Freddie Mac made mortgage banks take back $2.7 billion in loans in the first 9 months of 2009, according to Wall Street Journal. That amounts to a 125% leap over the previous year. Fannie Mae did the same to the tune of 4.3 billion during that time frame, says Inside Mortgage Finance. And investors who have purchased mortgage-backed securities over the years are also demanding buy-backs. Who then might be the lenders in the hook the most? No surprise here. Bank of America and J.P. Morgan Chase, among other large operators, are allegedly on top of the list, according to these publications. Interestingly enough these are the same huge finance companies who have pointed a heavy finger at mortgage brokers as being largely the source of the current meltdown. Hmmm!!?
Repurchasing bad mortgage paper will muddy up these banks' already ugly books even further. The mega operators usually are better able to absorb the hits than the regional and smaller banks. These numbers in the estimated low double digit billions of dollars in buy-backs thus far isn't that much from the total mortgage market that hovers in multiple trillions. But if the trend continues, it may start creating real trouble for the sector, putting additional hurt on the hoped-for real estate recovery.