Gov't: Banks Should Share Fannie, Freddie Costs

The nation's largest banks have an obligation to pay some of the cost for bailing out mortgage buyers Fannie Mae and Freddie Mac because they sold them bad mortgages, a government regulator said Wednesday.

Edward DeMarco, the acting director for the Federal Housing Finance Agency, said the banks this summer have refused to take back $11 billion in bad loans sold to the two government-controlled companies, in written testimony submitted for a House subcommittee hearing Wednesday. A third of those requests have been outstanding for at least three months.

DeMarco said the banks have a legal obligation to buy back the loans and called the delays "a significant concern." He said the government may take new steps to force those buybacks if "discussions do not yield reasonable outcomes soon."

In an interview with reporters after the hearing, DeMarco declined to give further details on what the government might do next. He said only that "we're looking for contractual obligations to be fulfilled."

The two mortgage giants nearly collapsed two years ago when the housing market went bust. The government stepped in to rescue them and it has cost taxpayers about $148 billion so far. The rescue is on track to be the most expensive piece of stabilizing the financial system.

Investors who buy loans from banks have the right to force lenders to repurchase them if they later discover fraudulent statements on loan applications.

The leading Democrat on the House Financial Services Committee subcommittee indicated the banks bear some responsibility.

"We must begin to think about approaches for recouping taxpayers' money in the long run," said Rep. Paul Kanjorski, D-Pa. "We found a way to pay for the savings and loan crisis, and we can survey find a way to recover the costs associated with this crisis."

Wall Street has worried that the costs of bailing out Fannie and Freddie could get pushed back on big banks. Fitch Ratings said in a report last month that the four largest U.S. banks could book losses of up to $42 billion if Fannie Mae and Freddie Mac force them to take back troubled mortgages they made. It also estimated that JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. could record $17 billion in losses if they repurchase a quarter of the mortgage giants' seriously delinquent loans.

Fannie and Freddie buy mortgages and package them into securities with a guarantee against default.

The Obama administration is working on a plan to restructure the mortgage market and make sure home loans are affordable. Officials don't plan to release details until next year. But Michael Barr, an assistant Treasury secretary, told the panel Wednesday that Fannie and Freddie "will not exist in the same form as they did in the past."

Figuring out what to do about Fannie and Freddie is a divisive issue on Capitol Hill, and it could grow even more contentious if Republicans take control of one or both houses of Congress.

Republicans have seized on the administration's management of Fannie and Freddie to illustrate Democrats' push for broadening the reach of the federal government. They say loans acquired by Fannie and Freddie since the September 2008 takeover have put taxpayers at risk.
- - "It's time for the government to get out of that business," said Rep. Spencer Bachus, the top Republican on the House Financial Services Committee.

But Democrats and regulators say the loans acquired by Fannie and Freddie before their takeover represent the overwhelming majority of the companies' losses. New loans acquired since then have been performing well, they note.

"There is no urgency," to reform the two companies, said Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee. "The pattern of abuse they had engaged in has been changed...Fannie and Freddie are behaving differently and are causing far less problems."