Wave of GSE Repurchase Demands to Continue

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MORTGAGE EXPERT
8 · 20 · 12

As the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. have expanded their scrutiny of representations and warranty breaches, the volume of repurchase demands has been on the rise and is not expected to soon subside. Now, smaller firms are also in the sights of the two housing finance agencies.

Fannie Mae and Freddie Mac have been widening their scope of review for violations of representations and warranties.

The government-sponsored enterprises have been emboldened by courts which have recently ruled that the mere existence of a representation and warranty violation could initiate repurchase.

Those findings were outlined in a report from Fitch Ratings.

“Fitch believes that if such causation (as the courts have referred to it) does not have to be proven, the level of claim activity could increase significantly in the medium term,” the report stated.

As a result, claims at the largest U.S. financial institutions have been steadily rising.

The increased activity — as well as conversations with the pair of secondary lenders suggesting that a greater sampling of older vintages would result in more future claims — is forcing the big banks to raise representation and warranty reserves.

Bank of America Corp. reported that its provision for representations and warranties was $395 million in the second quarter. Citigroup Inc.’s change in repurchase reserves were $242 million in the second quarter, while the figure was $597 million at Wells Fargo & Co.

Fitch said that Fannie and Freddie are increasing their focus on the large and mid-tier regional banks.

“Fitch notes the continuing flow of mortgage repurchase requests by Fannie Mae and Freddie Mac shows no signs of abating quickly, which poses an ongoing risk for the banking industry,” the ratings agency stated.

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Mortgage Daily Staff

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