Wells Fargo's reserve for repurchases, as of Dec. 31, totaled $1 billion, up from $589 million a year earlier. (AND THEIR GOING TO NEED EVERY SINGLE PENNY!!!)

Lenders Face Headwinds
As Mortgage Buybacks Escalate
By Aparajita Saha-Bubna, Of DOW JONES NEWSWIRES

Lenders such as Bank of America Corp. (BAC), J.P. Morgan Chase & Co. (JPM), Wells Fargo & Co. (WFC) and Citigroup Inc. (C) will brave stiff headwinds this year as they face increasing demands to buy back defectively underwritten mortgages.

Lenders bought back about $20 billion of loans with faulty underwriting in 2009, according to Barclays Capital estimates, writing off as much half of this amount as the loans were delinquent. Banks say mortgage buybacks could be a problem for earnings this year as well.

The vast majority of mortgages being put back comes from Fannie Mae (FNM) and Freddie Mac (FRE), according to Barclays and the banks' 10-K filings, as the mortgage finance giants step up efforts to collect on bad loans.

When these banks are forced to buy back souring loans, they typically do so at a loss. This means higher loss reserves and continued fallout from the housing crisis. For the lenders, which are among the largest sellers of mortgages to Fannie and Freddie, the repurchases wipe out a chunk of the income they earned in fees from making these loans.

"Mortgage repurchases should have a considerable impact on banks," said Ajay Rajadhyaksha, head of U.S. fixed-income and securitized strategy at Barclays Capital. "The lenders taking these loans back often have to write them down 40- 50 cents on the dollar." Banks bought back mortgages of about $15 billion through the first three quarters of 2009, according to Barclays data.

For instance, Wells Fargo bought back mortgages with balances of $1.3 billion in 2009. About three-fourths of repurchases were conforming loans from Fannie and Freddie. It incurred losses of $514 million on these repurchases. In 2008, it bought back $426 million of loans, while losses stemming from repurchases totaled $251 million.

Banks are already on the hook for bad mortgages residing on their books. But investors such as Fannie and Freddie are seeking to hold banks accountable as well for what they say are improperly underwritten mortgages sold to them in the past.

In 2009, Freddie Mac put back about $4.1 billion of single-family mortgages to lenders, more than double the $1.8 billion in 2008, according to its 10-K filing. In addition, Freddie's mortgage repurchase requests outstanding totaled $4 billion, as of Dec. 31. Freddie Mac and Fannie Mae don't lend directly to consumers, but buy or guarantee home mortgages from lenders.

A Fannie Mae spokesman said data on loans put back in 2009 weren't available. In 2008, Fannie bounced back roughly a quarter of the loans on 94,652 real- estate-owned, or REO, properties it reclaimed after foreclosure. In 2009, Fannie acquired 145,617 REO properties.

"Borrowers, the mortgage industry and taxpayers are all well served when Fannie Mae exercises its rights to require lenders to repurchase loans that do not meet Fannie Mae's underwriting standards," Terry Edwards, an executive vice president at Fannie, said in a statement. Fannie and Freddie are controlled by the U.S. government, which has bailed them out to the tune of $126.9 billion.

To be sure, lenders are putting up a fight. Addressing the issue of mortgage repurchases at a conference in February, Barbara Desoer, president of Bank of America's mortgage business, said, "We continue to fight the battle at a loan- by-loan level." As of Dec. 31, nearly 30%, or $1.1 billion, of Freddie's unfulfilled repurchase requests were outstanding for more than 90 days.

In most cases, investors holding these loans can force the lender to take the mortgages back, and recover the unpaid principal on them, if they were underwritten improperly. For instance, lenders would have to buy back loans from investors if borrowers lied about their income or misstated that the property is their primary residence. Other reasons a loan may be put back: a fraudulent home appraisal or inadequate documentation.

In 2009, Bank of America bought back first-lien mortgages with balances of $ 1.5 billion tied to faulty underwriting, compared with $448 million in 2008; expenses related to repurchases jumped to $1.9 billion last year from $246 million in 2008. The buybacks were "predominantly" loans from Fannie and Freddie, said a spokesman.

J.P. Morgan had $1.7 billion, as of Dec. 31, set aside to meet repurchase claims from investors, compared with $1.1 billion a year earlier. The company last month said repurchase demand "remains elevated" at around $1 billion each quarter. It said loan repurchase claims are resolved through a review process with Fannie and Freddie within about two to three years.

Wells Fargo's reserve for repurchases, as of Dec. 31, totaled $1 billion, up from $589 million a year earlier.

Citigroup's repurchase reserve held a balance of $482 million, as of Dec. 31, up from $75 million a year earlier, according to its 10-K filing. A Citigroup spokesman declined to comment.

Inadequate mortgage repurchase reserves spelled the end for lender New Century Financial in 2007. At the time, its underreserving allowed the lender to overstate its financial reports.

-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729; aparajita.saha- bubna@dowjones.com