Tuesday, September 11, 2012

New repurchase rules could affect Bank of America

The federal agency overseeing Fannie Mae and Freddie Mac announced Tuesday new rules governing mortgage put-backs that could help head off the type of protracted battle that the mortgage giants have had with banks like Bank of America.

One of the biggest provisions is that the government-sponsored entities would no longer make repurchase demands on loans where the borrower had made 36 months of "consecutive, on-time payments," according to a statement.

Mortgage putbacks occur after a bank sells a mortgage to another party. If the buyer thinks that the bank that originated the mortgage misrepresented its quality, the buyer can try to force the bank to buy it back. They're often called rep and warranty claims.

These have been a particular bone of contention between Bank of America and Fannie and Freddie in recent quarters. In the second quarter, putback requests reached $22.7 billion, up from $16.1 billion the quarter before. Bank of America had set aside $15.9 billion. Investors have called Bank of America's exposure to repurchase demands their biggest concern.

Of particular contention were put-back requests on loans where the borrower had already made several years of payments. An industry standard is 25 payments.

Other parts of Tuesday's announcement:
  • For HARP loans, putbacks end after 12 months of payments.
  • Fannie and Freddie will review loans within 30 to 120 days of purchase, not when it goes into default.
"For the market to reclaim the strength it once had – and to provide a cornerstone for the mortgage market of the future – it is vital we consider ways to improve the representation and warranty model," Federal Housing Finance Agency head Ed DeMarco said in a speech to bankers in Raleigh on Monday, according to prepared remarks. "Lenders want more certainty about their risk exposure and the Enterprises want to ensure the quality of the loans that are delivered to them."

The new standards don't go into effect until Jan. 1, so they don't cover the loans currently in dispute. Bank of America CEO Brian Moynihan said in the bank's second quarter conference call that a large part of the loans they're dealing with now were originated in 2006 and 2007.


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