This is HUGE...Fannie, Freddie Ask Banks to Eat Soured Mortgages

[dixiegrrrrl]

March 5 (Bloomberg) -- Fannie Mae and Freddie Mac may force lenders including Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages.

That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says U.S. banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.
http://www.bloomberg.com/apps/news?pid=20601087&sid=ax.OUty1SiG4&pos=4

check out Denninger's take on this:

The mortgage firms are looking at every loan more than 90 days past due and “asking us basically to give them all the documentation to show that it was properly underwritten,” JPMorgan’s Scharf said. “We then go through a process with them that takes a period of time, and literally it’s every loan, loan-by-loan, and have the discussion on whether or not we actually should buy the loan back.”

That's exactly what I said would happen more than two years ago.

EVERY LOAN.

If there was appraisal fraud OR

If there was income fraud OR

If there was DTI fraud OR

If the automated underwriting was gamed OR

If there was asset fraud

THEN the bank gets rammed with a repurchase demand on the bad paper - paper that is 90 days+ and, in essentially every case, dramatically underwater.

The "dream" that this will result in "only" $7 billion in losses (30% of the repurchased amount) is a fantasy.

The most common include inflated appraisals or falsely stated incomes in the loan applications, said Larry Platt, a Washington-based partner at law firm K&L Gates LLP who specializes in mortgage-purchase agreements. The government agencies hire their own reviewers who go back and compare the appraisals with prices from historical home sales, he said.

Ding ding ding ding ding ding.

The truly ugly news isn't found in these mortgages. It is found in the second lines - HELOCs and "Silent Seconds" - that are behind these agency mortgages. Those are worth zero once the first defaults, and when the repurchase demand is perfected the auditors are going to force these loans to be recorded at their likely recovery value - which is zero.

There are literal hundreds of billions of dollars worth of that trash on all of the big banks balance sheets, and all of it is being carried under assumptions that nearly every one of those loans is "money good." 80% of the dollar value of these HELOCs and Seconds are in the bubble areas and of those virtually all are behind an underwater first.

The assumption that these loans are "money good" is blatantly and intentionally false. It is a fiction that our regulators, examiners and auditors have foisted upon the public, and if you rely on it, you will get burned.

Oh, JP Morgan's net income for all of 2009? $11.7 billion.

Much more: ( 2/3 way down the page)

http://market-ticker.denninger.net/

[notadmblnd]

1. I can't tell you how sad this makes me.

:sarcasm:

[leftofcool]

2. I smell another bank bailout

[cutlassmama]

11. Yep and what do you bet that Goldman Sachs will be the receipient of

the money too?

[nc4bo]

14. Yep or at least a plea for one. nt

[polpilot]

3. If it gets to be an issue the banks will make a 'political contribution'.

It'll magically disappear.

[dixiegrrrrl]

4. Funny you should say that..

from deep within the article:
"“If it becomes too big of an issue, the banks are going to complain to Congress, and they’re going to stop it.”

[roguevalley]

5. I don't think they have the stomach to face the wrath if they do.

[DCKit]

6. Sweet. n/t

[econoclast]

7. I have news for you

21billion is a drop in the bucket. The congress just recently upped the spending cap on the eventual Freddie Fannie cleanup to 400 billion!

Freddie and Fannie are at the black heart of this whole mess. It was the implicit government guarantee that gave all the players the confidence to keep rolling the dice on bigger and bigger pots. And Fannie and Freddie couldn't buy the paper fast enough. They were none to curious about proper docs back then. Remember the accounting scandal in the early 2000's? And how there was an abortive move in congress to get Fannie and Freddie to stop buying these things and stuffing them on their balance sheets? I certainly do. And who was Fannieand Freddie's rabbi back in Washington who smoothed it all over. Our very own Barney Frank. He who famously pronounced in 2005 that he saw no problems at Fannie and Freddie. And wasn't Rahm Emmanuel a director at either Fannie or Freddie?

This whole mortgage mess would have been regretable but small potatos but fir Fannie and Freddie. It couldn't have been done on an industrial scale without the implicit government guarantee they offer and the free reign that gives investors. If they had been unwilling to buy the dodgy mortgages back then the whole train would have ground to a halt. But no.

[jtuck004]

9. So I wonder who is more complicit - the burglar or their fence?

[Celebration]

12. wrong

It was the AIG type fraud, "insurance" on this worthless paper that kept the problem from being small potatoes. This was insurance with no capital behind it. Basically it was bets being placed with no capital. So what did we do? Pay it all at 100% of value, to keep the system from coming down, and keep Goldman shareholders in great shape.

Fannie and Freddie were a minor part of it all. They didn't create paper out of thin air. Sure, they wanted in on the action, but were late to the game.

And, I wouldn't be so quick to blame implicit government guarantees. What about the so called AAA ratings of the likes of Moody's to all this junk????

[Po_d Mainiac]

15. Get your shit straightened out....n/t

[pscot]

8. Do they get a brat with those?

n/t

[lonestarnot]

10. 100's of billions, why 21 billion?

[pokercat999]

13. Every bank the FDIC has shut down has had a -25% to as much

as a -37% valuation of their assets. Just like Enron, on the books, they are "overestimating" the value of their assets. Is there ANY reason to think that's not true of almost all banks and especially the too big to fail banks? We are just getting to the top of the Rollie coaster, tighten your seat belt and get ready for the wildest ride of your life.

[Joanne98]

16. Fannie and Freddie are probably getting tired of getting blamed for everything

By the stupid right-wing conspiracy theorists. The banksters made the bad loans. They should have to eat them.