Returning bad loans to the banks

Fannie Mae and Freddie Mac, tired of buying up bad loans, are forcing banks to take them back.

By Kim Peterson Mar 5, 2010 2:55PM
Mortgage payment © Hemera Technologies/JupiterimagesAs far as meals go, this one probably ranks right up there with liver and onions.

Fannie Mae and Freddie Mac may force lenders to eat billions of dollars in mortgages gone bad, Bloomberg reports.

When these loans get returned and marked down to their true value, the banks could suffer losses of $7 billion this year, according to one analyst. The banks involved include Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC).

The banks had to suffer through this distasteful meal already -- Fannie and Freddie stuck them with about $5 billion in losses on buybacks last year. Looks like the losses could be worse this time around.

Why would banks accept this? Because now, Fannie and Freddie buy at least 70% of new mortgages, Bloomberg reports. And if the banks want to keep Fannie and Freddie happy, they had better take the bad loans back.

"If you want to originate mortgages and keep that pipeline running, you have to deal with the pushbacks," one analyst told Bloomberg. "It doesn't matter how much you hate Fannie and Freddie."

And hate, well, that's not too strong of a word here. Freddie Mac alone made lenders buy back $4.1 billion in bad mortgages last year, Bloomberg reports. That's triple the amount from 2008.

Freddie says that banks shouldn't have sold it so many toxic loans, and now they have to pay the price.

“We are trying to be good stewards of taxpayer dollars and as part of that, it’s important that those dollars not go to loans that should not have been sold to us in the first place," a spokeswoman told Bloomberg.

So you have one arm of the government helping to bail out these banks and another arm (if you can call Fannie and Freddie that, which I do) forcing bad loans back on them.

The rules require that banks selling mortgages to Fannie and Freddie provide proof that the loans meet those agencies' standards, Bloomberg reports. Now, Fannie and Freddie are wondering why so many of those loans are bad, and are demanding that the banks turn over their loan files.


3Comments
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
275
275 rated 2
482
482 rated 3
656
656 rated 4
643
643 rated 5
650
650 rated 6
638
638 rated 7
485
485 rated 8
281
281 rated 9
127
127 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
AAPLAPPLE Inc10
ATVIACTIVISION BLIZZARD Inc10
CTSHCOGNIZANT TECHNOLOGY SOLUTIONS10
FOXATWENTY-FIRST CENTURY FOX Inc CLASS A10
HPQHEWLETT PACKARD CO10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.