ATLANTA (Reuters) - Demands that U.S. banks repurchase faulty loans made during the housing boom emerged as one of the most sensitive topics for mortgage bankers at a conference on Monday, with one executive charging the issue was chilling lending.
Banks over the past year have been under siege from the demands, primarily from U.S. mortgage funding giants Fannie Mae and Freddie Mac. Shares of some banks have come under pressure due to speculation the costs associated with loan repurchases will rise.
The demands for buybacks are typically based on violations of so-called representations and warranties, used by lenders to assure investors of that all aspects of the loan are as stated. The lax enforcement of such standards led to folly, or fraud, in lending during the boom, analysts said.
Fannie Mae and Freddie Mac are seeking repurchases to offset losses that are being borne by taxpayers. Some private investors are also asking banks to buy back allegedly faulty loans.
“Repurchases look to be a way of life going forward,” Daniel Arrigoni, chief executive officer at U.S. Bank Home Mortgage, said at the Mortgage Bankers Association annual conference in Atlanta.
Fannie Mae and Freddie Mac have hired people “to go through loans with a fine-toothed comb, and they’ve done a good job,” he added, drawing nervous laughter from the audience at the conference.
Ron McCord, chairman of First Mortgage Co, said repurchases do more harm than good by chilling lending. “This industry has to stand up and say, enough is enough,” he said, to applause.
Lenders have responded to repurchase requests with more stringent background checks on borrowers, and tightening lending requirements even beyond what Fannie Mae and Freddie Mac require.
The consequence of the “overlays” that banks put on lending requirements has been that fewer homeowners have been able to take advantage of record low interest rates and save money through refinancings, an important economic stimulus.
“Why are we having these overlays? Because we are having a fear of repurchasing these loans,” said McCord, who said Fannie Mae and Freddie Mac were essentially using taxpayer dollars to make cases for repurchase demands.
“We’re trying to be out there lending to help this recovery,” he added.
Reporting by Al Yoon; Editing by Tim Dobbyn