(Updates with banks declining comment)
By Al Yoon
NEW YORK Aug 18 (Reuters) - The four largest U.S. banks could face as much as $42 billion in losses as they repurchase faulty mortgages from housing finance giants Fannie Mae and Freddie Mac, Fitch Ratings said on Wednesday.
Total repurchases are based on the success of Fannie Mae FMNA.OB and Freddie Mac (FMCC.OB) proving their cases, but Fitch said it is concerned that more aggressive requests by the companies could expose banks to greater than expected losses.
Under an "extremely adverse scenario," the pool of "at risk" loans for JPMorgan Chase & Co (JPM.N), Citigroup Inc (C.N), Bank of America Corp (BAC.N) and Wells Fargo & Co (WFC.N) could total $175 billion to $180 billion, Fitch said.
Spokesmen for the banks declined to comment on the Fitch report, or had no immediate comment.
Fannie Mae and Freddie Mac are pushing to recover losses on loans that failed to meet "representations and warranties," which state that loans sold into mortgage bond programs fit strict underwriting requirements. As the government-sponsored enterprises (GSEs) are life support from the U.S., repurchases would help offset the tens of billions of dollars being laid out by taxpayers.
Banks have responded by increasing reserves for repurchases, but are also challenging the claims.
Under an "adverse but less likely" scenario where Fannie Mae and Freddie Mac successfully put back 50 percent of bad loans and the banks can still recovery 50 percent of the assets' value, the institutions could lose $42 billion, Fitch said. If the GSEs put back 25 percent of the loans, the expected loss could be $17 billion, it said.
Fitch said a more moderate case is the most likely outcome. Losses for banks if the GSEs put back 35 percent of loans would be about $27 billion, it said.
Potential repurchases demanded by investors holding privately-issued mortgage bonds were not factored into the Fitch study. Fannie Mae and Freddie Mac are also among investors in the private mortgage securities.
Fannie Mae and Freddie Mac are likely concentrating on loans where some normal documentation, such as proof of income, was not required, Fitch said.