Bank Credit May Suffer as Mortgage Buybacks Rise

Aug 10th, 2010 | By businessnews | Category: Business


August 10, 2010, 2:05 PM EDT




By David Henry


(Adds repurchase reserves in the fifth paragraph.)

Aug. 10 (Bloomberg) — Bank credit may come under pressure and profits could suffer for years as the Federal Reserve, Fannie Mae and insurers step up demands on lenders to take back faulty mortgages, according to Moody’s Investors Service.

Repurchase requests tied to mortgages made during the housing boom are increasing and expenses are rising at U.S. banks, New York-based Moody’s said in a report yesterday. New pressure is coming from the Federal Reserve Bank of New York, which acquired stakes in mortgage securities when it helped salvage Bear Stearns Cos. and American International Group Inc. in 2008, the report said.

“The need to build reserves against this potential exposure is likely to continue, and will continue to be a drag on bank earnings for another year or longer,” the report said.

Banks face demands for refunds on defaulted loans from mortgage investors including Fannie Mae and Freddie Mac, both controlled by the U.S., as well as guarantors such as MGIC Investment Corp. and private investors. Banks can be forced to take back mortgages from buyers if documents are missing or contain false information.

Bank of America Corp., the biggest U.S. bank by assets, has said it faces $11.1 billion of requests to repurchase soured mortgages. Repurchase reserves at the four largest U.S. banks totaled more than $8 billion as of June 30, Moody’s said.

Debt buyers and insurers, who can rescind their coverage, are combing through loan documents for faulty appraisals, inflated borrower incomes and other flaws that could support a repurchase demand. The process is “often costly, lengthy, and litigious,” which can deter private individuals, Moody’s said, adding that the New York Fed’s participation may make it easier for those investors to organize.

–Editors: Rick Green, William Ahearn

To contact the reporter on this story: David Henry in New York at dhenry19@bloomberg.net

To contact the editor responsible for this story: Alec D.B. McCabe at amccabe@bloomberg.net



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