In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Wednesday, October 20, 2010

WSJ: Here come the GSE Put-Backs

by Calculated Risk on 10/20/2010 10:56:00 PM

From Nick Timiraos at the WSJ: Regulator for Fannie Set to Get Litigious

[The FHFA] hired a law firm specializing in litigation as the agency considers how to move forward with efforts to recoup billions of dollars on soured mortgage-backed securities purchased from banks and Wall Street firms.
In a statement, the FHFA said it is analyzing requested information and that "no decisions for future action have been made."
Back in July, the Federal Housing Finance Agency announced: FHFA Issues Subpoenas for PLS Documents
FHFA, as Conservator of Fannie Mae and Freddie Mac (the Enterprises), has issued 64 subpoenas to various entities, seeking documents related to private-label mortgage-backed securities (PLS) in which the two Enterprises invested. The documents will enable the FHFA to determine whether PLS issuers and others are liable to the Enterprises for certain losses they have suffered on PLS.
The GSEs have a huge advantage over other investors because the FHFA can issue subpoenas. The article mentions estimates that the banks could face put-backs ranging from $24 billion to as high as $179 billion. Quite a range and the actual amount will probably be towards the lower end of the range, and this will play out over a long period (unless there is a settlement).

Note: It is difficult for private investors to obtain the actual loan documents - and that is one of the hurdles the investors asking BofA to repurchase loans need to overcome. Yves Smith at Naked Capitalism points out some of the difficulties: More on Why the PIMCO, BlackRock, Freddie, NY Fed Letter to Countrywide on Putbacks Is Way Overhyped. However the private investors can obtain the required voting rights (usually 25% to 50% depending on the deal), and essentially force the trustee to make the servicer turnover the loan documentation. As I mentioned last night, put-backs could be a big issue for the banks, although I think it will play out over several years and not be a serious issue for the economy.