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Fannie, Freddie To Pursue Putbacks, Subpoena

JPMorgan, Among Others, In Seeking Loan Level
Detail
By Tyler Durden
Created 10/20/2010 - 22:22

First it was the New York Fed, now the FHFA itself (regulators of Fannie and Freddie) is getting involved in
putbacks. The WSJ [1]has just reported that the GSEs have hired law firm Quinn Emanuel as the "agency
considers how to move forward with efforts to recoup billions of dollars on soured mortgage-backed securities
purchased from banks and Wall Street firms... The FHFA hasn't disclosed the targets of its subpoenas,
though some banks have acknowledged receiving them, including J.P. Morgan Chase & Co. The probe
is focused on so-called private-label securities that were originated by mortgage companies, packaged by
Wall Street firms and then sold to investors." Not to be confused with RoboSigning, which is at the heart of
the Fraudclosure and could serve as a catalyst to what some claim as the unwind of the multi-trillion MBS
market in a worst case scenario, this is a parallel effort that seeks to get banks to repurchase far more of
misrepped and miswarrantied mortgages. As we previously disclosed, it is precisely this ongoing action that
Bank of America [2] and Wells Fargo [3] have been (under)reserving against: and if the GSEs, together with
the FRBNY, Pimco, BlackRock and who knows who else, are sensing the current moment as one of terminal
weakness for the mortgage servicers, who knows how many billions in mortgages could be putback to the
TBTF banks, who are luckily flush with still fresh taxpayer cash and trillions in excess reserves. Either way, it
appears that while the New York Fed is going after BofA, the GSEs are about to dine on Jamie Dimon. Either
that, or all this is a smokescreen to promptly settle all current and future possible litigation in an adversarial
process involving government entities, and thus streamlined to a mutually amicable resolution.

More from the WSJ [1]:

The FHFA's efforts could ultimately lead to a settlement that would avoid protracted legal
battles, analysts said.

"There's going to be much more incentive to negotiate seriously and quickly than if they
had done this seven months ago, when people were blithely ignoring the fraud,"says
William K. Black, a former federal bank regulator who is now an associate professor at
the University of Missouri-Kansas City School of Law.

Estimates about banks' ultimate exposure vary considerably because it isn't clear how
aggressively investors will pursue claims, or how successful they will be. Banks could face
between $55 billion and $179 billion in repurchase demands from investors, according to
Compass Point Research & Trading, a Washington boutique investment bank. Estimates
from FBR Capital Markets say repurchase demands could be lower, between $24 billion

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and $51 billion.

The FHFA subpoenas could mark the beginning of a new attempt to recover losses on
soured mortgages from banks.

Of course, the GSEs' involvement in this mess could open them up even wider to potential liability:

So far, most efforts to force banks to repurchase mortgages have focused on mortgages
that Fannie and Freddie bought and guaranteed themselves, and not from mortgage
securities issued by Wall Street firms.

The mortgage giants are sorting through their growing pile of delinquent loans to find
sloppy or fraudulent loan underwriting that constitutes a violation of representations and
warranties.

Those repurchase demands have risen as delinquencies mushroomed. Fannie and Freddie
have put back $6 billion in mortgages during the first half of the year, and banks could
face another $22 billion through 2012, according to a report published Tuesday by
analysts at RBS Securities Inc. Banks, for their part, have grown more aggressive in
recent months in challenging those put-back efforts.

For those unsure how the GSEs can pursue legal action against banks for basically doing their work for them,
the WSJ explains:

While Fannie and Freddie don't make loans directly, they support housing markets by
buying mortgages from banks and then selling them to investors as securities, providing
guarantees. But during the housing boom, Fannie and Freddie augmented their role in the
housing market by purchasing privately issued securities as investments. They became two
of the largest investors in those bonds.

Those securities were often backed by subprime loans and mortgages that required little
or no documentation of borrower incomes, which deteriorated sharply once home prices
fell. Fannie and Freddie couldn't purchase those loans directly, but they were allowed to
invest in slices of the securities that carried triple-A ratings.

Fannie and Freddie purchased $227 billion of bonds backed by subprime and other risky
loans in 2006 and 2007. The value of those securities plunged as the housing boom turned
to bust, and losses have accounted for around 9% of the firms' capital hole. So far, the
government has injected $148 billion to keep the mortgage giants afloat.

So why subpoenas?

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Some analysts say Fannie and Freddie, which touted their unparalleled mortgage-market
expertise, could be hard-pressed to argue that they didn't know what they were buying.

But the subpoenas could help Fannie and Freddie access loan files for the mortgages
backing their bonds and to demonstrate that the loans didn't conform to underwriting
guidelines.

The loan files "are really the Holy Grail here,"says David Grais, a Aew York securities
lawyer who represents the Federal Home Loan Banks of San Francisco and Seattle, which
have sued Wall Street firms to buy back soured mortgage securities.

Difficulty obtaining those loan files is one reason why there have been so few efforts by
investors to force repurchases so far. Investors need to access the loan files to determine
if there has been a specific violation of certain contracts, but they can't petition trustees
for loan pools to take action without first identifying that breach.

I"t's a real Catch-22 for them,"says Isaac Gradman, a San Francisco-based consultant.

Subpoenaing is a uniquely FHFA-based privilege, which however will likely open up a can of worms once all
the heretofore private data enters the public domain:

If the FHFA is successful in proving that loan files didn't meet underwriting standards or
that their ownership chain wasn't properly transferred during the securitization process,
that could pave the way for other investors to make similar challenges, said Joshua Rosner
of investment-research firm Graham Fisher & Co.

No matter how this particular storyline developes, one thing is certain: in the nearly $14 trillion US mortgage
market, things will get heated. Throw in midterm elections in some angry politicians, and it will get really
interestng.

Bank of America Blackrock Capital Markets Excess Reserves Fisher Housing Market Jamie
Dimon New York Fed PIMCO ratings RBS Wells Fargo

Source URL: http://www.zerohedge.com/article/fannie-freddie-pursue-putbacks-subpoena-jpmorgan-among-

others-seek-loan-level-detail

Links:
[1] http://online.wsj.com/article/SB10001424052702304011604575564631414300418.html
[2] http://www.zerohedge.com/article/can-you-spell-u-n-d-e-r-r-e-s-e-r-v-e-d-if-not-here-visualization
[3] http://www.zerohedge.com/article/wells-fargo-loan-repurchase-reserve-liability-13-billion-144-billion-
loan-originations

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