You can make a case — call it the caveat emptor case — that no one should be able to recover any losses they suffered from loans that went bad. If they had performed even rudimentary checks before the loans were made, sold, rated, insured or securitized, it’s very likely that big problems would have been visible before disaster hit. There would have been fewer bad loans and many fewer foreclosures.
That case is not, however, showing any sign of prevailing as legal battles increase in number. Instead, it appears that big banks will be compelled to pay for their own sins as well as the sins of others.
Already the four big commercial banks — JPMorgan Chase , Bank of America , Wells Fargo and Citigroup — have taken losses of $9.8 billion on loans they have repurchased or expect to be forced to repurchase. Moshe Orenbuch, an analyst at Credit Suisse, says he thinks that figure will rise to $20 billion or $30 billion before the wave is over. Other analysts think the number could be significantly higher.
Even now, long after we learned just how bad the underwriting standards were, it is surprising to see how bad many of these loans were. In the second quarter, Wells Fargo repurchased $530 million of mortgage loans. It concluded those loans were worth, on average, a little less than half their face value.
Wells says it has the right to recover some of that from the companies that sold it the loans. Unfortunately, “due primarily to the financial difficulties of some correspondent lenders, we typically recover on average approximately 50 percent from these lenders,” Wells added in a filing with the Securities and Exchange Commission.
So far, most of the money the banks have paid has gone to Fannie Mae and Freddie Mac, which used to be government-sponsored enterprises and now, after the bailouts, are government-controlled. But even though they have collected billions, Fannie and Freddie are getting increasingly frustrated with the banks for what they see as foot-dragging.
Freddie, in its quarterly report filed this month, said it was now requiring banks “to commit to plans for completing repurchases, with financial consequences or with stated remedies for noncompliance, as part of the annual renewals of our contracts with them.”
A spokesman for Freddie would not say just what those remedies or financial consequences might be. But any bank that wants to keep offering mortgages must have contracts with Fannie and Freddie. Tying the repurchases to contract renewals could be a strong bargaining chip.