Fannie Mae and Freddie Mac Pushing Banks to Buy Bad Loans

Isn't this how we got into trouble in the first place?  Banks being forced to write bad mortgages were forced to hold too many bad loans? Then why are the federal government-owned Fannie Mae and Freddie Mac pushing banks to buy back their lousy loans. Its kind of like the "anti-TARP," instead of helping out banks, we are forcing them to rack up losses.

Bloomberg is reporting that Fannie Mae and Freddie Mac may force lenders including Bank of America Corp., JPMorganChase & Co., Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages.

That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says U.S. banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.

The banks have to accede to the request of the government-owned entities, since they purchase almost three-quarters of all new mortgages.

The surge shows lenders are still paying the price for lax standards three years after mortgage markets collapsed under record defaults. Fannie Mae and Freddie Mac are looking for more faulty loans to return after suffering $202 billion of losses since 2007, and banks may have to go along, since the two U.S.- owned firms now buy at least 70 percent of new mortgages.

“If you want to originate mortgages and keep that pipeline running, you have to deal with the push-backs,” said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, and former examiner for the Federal Reserve. “It doesn’t matter how much you hate Fannie and Freddie.”

But didn't we just spend three-quarters of a trillion dollars to keep these banks from going under? Why in the world would we want to make them take losses?

The government’s efforts might be counterproductive, since the Treasury and Federal Reserve are trying to help banks heal, FBR’s Miller said. The banks have to buy back the loans at par, and then take an impairment, because borrowers usually have stopped paying and the price of the underlying home has plunged. JPMorgan said in a presentation last month that it loses about 50 cents on the dollar for every loan it has to buy back.
Striking a Balance

Great, so now the banks are essentially "bailing-out"  Freddie and Fannie.

“It’s a fine line you’re walking, because the government’s trying to recapitalize the banks, not put them in bankruptcy, and then here’s Fannie and Freddie putting more pressure on the banks through these buybacks,” FBR’s Miller said. “If it becomes too big of an issue, the banks are going to complain to Congress, and they’re going to stop it.”

The costs to the banks go beyond taking the losses, Barbara Desoer, head of Bank of America’s mortgage division, said at a Feb. 10 investor conference that the bank added staff to handle increased claims from Fannie Mae and Freddie Mac.

It’s hard to feel sympathy for lenders that slackened or ignored credit standards during the housing boom. But Freddie and Fannie knew what they were getting into when they bought the loans. The quasi-private firms were a major cause of the mortgage crisis, using their (then implicit) government subsidy to expand and leverage up far more than any truly private company could, then using their size to buy or back vast amounts of subprime debt.

This is just another example of what happens when government takes over a buisness, conflicting objectives and really silly decisions.