BUSINESS
11/30/2010 09:42 am ET | Updated May 25, 2011

Fannie, Freddie Fighting Banks On Mortgage Buybacks

As doubts continue over the legitimacy of mortgage documents, two government-owned mortgage companies are having trouble offloading loans onto the banks that originated them.

And one employee inside Bank of America has raised further doubts about the bank's handling of crucial mortgage paperwork.

Fannie Mae and Freddie Mac, the government-sponsored companies that became taxpayer-owned during the worst of the financial crisis, are meeting resistance from big banks, who as of the end of September hadn't responded to requests that they buy back about $13 billion worth of mortgages, Bloomberg reports.

Fannie and Freddie, whose main function is to buy or guarantee mortgages from banks and thereby make it easier for banks to lend, claim these mortgages are missing key components, such as a verification of the borrower's income. The banks, for their part, say Fannie and Freddie are unfairly reevaluating loans they once thought were solid.

Homeowners and investors, meanwhile, may have yet another weapon in their arsenal as they pressure banks to correct alleged mortgage errors, as Bloomberg points to a bankruptcy case in which a Bank of America employee said her company tended to mishandle critical mortgage paperwork.

The employee, Linda DeMartini, said Countrywide Financial, now owned by Bank of America, often held onto mortgage notes, even as it sold those mortgages to be repackaged into securities. The note, a crucial document that sets the terms of the debt payment, is supposed to travel with the mortgage as it is sold (and often resold). Securitization deals usually require a trustee -- not the originating bank -- to own the note.

By proving the absence of a note, a homeowner could block a foreclosure, or an investor could pressure a bank to buy back a security. In Bank of America's case, the judge ruled a trustee couldn't foreclosure on a home, because the bank hadn't given the trustee the mortgage note.

Both the buyback battle and the controversy over mortgage notes are symptoms of a larger controversy over mortgage and foreclosure documents. As foreclosure processors have revealed they signed thousands of foreclosure documents daily without reading them, big banks, including Bank of America, JPMorgan Chase and Wells Fargo, halted foreclosures. Some of these "robo-signers" were ignorant of the basic components of a mortgage. In response to the revelations, all 50 state attorneys general have launched an investigation, and Federal prosecutors are exploring whether banks broke the law.

So far, Fannie and Freddie have won buy-backs for up to 39 percent of the loans they don't like, a refund that could result bank losses as high as $33 billion, Bloomberg says, citing analysis from FBR Capital Markets. The total loss to banks, once the dust has settled, could be much higher. One estimate, from Compass Point Research and Trading LLC, places it at $179.2 billion.

As the crisis drags on, the already weak housing market could continue to suffer. When it's unclear who exactly owns a house -- the bank, the original owner or someone else -- it's difficult for potential buyers to feel confident.