The Following Article is from the Winter 2010 Newsletter
Forced repurchases of soured U.S. mortgages may be the biggest issue facing banks, even as errors in the foreclosure process draw attention to other industry risks. Future losses from repurchases of home loans whose quality failed to meet sellers’ promises will likely total $55 billion to $120 billion for the next five years accordingly to leading mortgage-bond analyst reports recently issued. While a firestorm of news sparked by some loan servicers decisions to halt action on defaulted loans is drawing renewed attention to banks’ mortgage repurchase risks, the foreclosure issues themselves are mostly process oriented problems that can be fixed.
The buybacks demand in turn upon banks is a result of bad loans sold by the banks primarily to Fannie Mae and Freddie Mac. Those two agencies purchased nearly $267 billion in nonperforming loans out of mortgage-backed securitization pools during the first half of the year, a figure that potentially could lead to massive foreclosures down the road if the government-sponsored enterprises (GSE’s) cannot rework these problem loans.
The acquisition of nonperforming loans (NPL) from MBS trusts was a record by far and it appears both GSEs, for now, are winding down their repurchases. Fannie bought $170 billion in NPLs out of trusts during the first half of 2010. Freddie repurchased $96.8 billion, according to a public filing with the Securities and Exchange Commission.
But the acquisitions could also foretell more foreclosures. Investors in the nonperforming loan market, foreclosure vendors and Wall Street analysts are keeping a close eye on GSE delinquent loans as a harbinger of where the market might be headed. The problem is that repurchase requests have not peaked and will remain at their elevated level for at least three years, according to lawyers who represent banks and mortgage servicers. Estimates vary but some mortgage advisers and analysts predict that foreclosures could total upward of 7 million units over the next three years.
Joseph Levy is the Owner of Affiliated Capital Resources, a mortgage banking firm in Santa Monica, CA. Mr. Levy received his MBA Degree in Real Estate Investment Finance from University of Connecticut and was formerly Investment Director of Aetna Life and Casualty.