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.

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