We were so caught up with the Fed’s big document dump yesterday that we missed the important testimony about put-back risk given yesterday by Federal Reserve governor Daniel Tarullo to the Senate banking committee.
Tarullo message was very clear: the big banks have failed to properly reserved for put-backs.
“During the third quarter of 2010, Fannie Mae collected $1.6 billion in unpaid principal balance (UPB) from originators, and currently has $7.7 billion UPB in outstanding repurchase requests, $2.8 billion of which has been outstanding for more than 120 days. Freddie Mac has $5.6 billion UPB in outstanding repurchase requests, $1.8 billion of which has been outstanding for more than 120 days. As of the third quarter of 2010, the four largest banks held $9.7 billion in repurchase reserves, most of which is intended for GSE put backs,” Tarullo said.
Got that? Banks have $13.3 billion in put-back requests from Fannie and Freddie alone, while the reserves at the four biggest originators total just $9.7 billion.
Still not sure what a put-back is? Here’s how Tarullo explains it:
“The essence of these claims is that mortgages in the securitization pools, or sold as unsecuritized whole loans, did not conform to representations and warranties made about their quality–specifically that the loan applications contained misrepresentations or the underwriting was not in conformance with stated standards.”
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