Sunday, we discussed the fact that not only were some big mortgage loan seller/servicers “pushing back” on Fannie Mae and Freddie Mac when those GSEs try to force loan repurchases, but that the Mortgage Bankers Association was holding a series of seminars around the country for bankers on how to fight the repurchase requests. Today, Bloomberg.com reported that the MBA was taking “direct action,” talking to both Fannie and Freddie and urging them to “ease back on the buybacks.”

While his members “certainly understand” their contracts
require repurchases of defaulted loans when faulty appraisals,
inflated borrower incomes or missing documentation are
discovered, the Mortgage Bankers Association has started to
“aggressively” push the two companies and their regulator to
ease up, [MBA president John Courson] said.

[...]

“We’re trying to see if we can’t reach some type of a
system that says there is a bright line out there, if this loan
has been making payments and defaulted for a reason that is
neither fraud nor related to the underwriting of the loan, it
shouldn’t be subject to a repurchase,” he said.

We warned about these practices five years ago.

In good times, when the percentage of defaults is relatively manageable,
the  purchasers of such loans (who customarily bundle and securitize
them) tend not to look closely at these representations and warranties;
however, in bad times, the holders of the loans have been known to
require a second “scrubbing” of the loan files, looking for breaches of
representations and warranties that will justify requiring the
originator to repurchase the loan. In the last economic downturn, I
personally experienced more than one instance of a mortgage lender
suffering the infliction of extreme financial and emotional pain caused
by buyback demands from secondary market purchasers like FNMA, FHLMC and
private institutional investors.

What Courson and others are complaining about are teams of forensic examiners parsing a loan file when a loan defaults, looking for any purported defect that might justify a loan repurchase demand, even if, ultimately, most of the purported “defects” don’t support the buyback demand.

“Lenders are getting repurchase requests on the same loan
at multiple times for multiple issues, which shows you they’re
going from station one, to station two, to station three” as
the companies and their contractors “scrub” loan files looking
for errors that weren’t material or never occurred, he said.

Unfortunately, as we also pointed out Sunday, the lender ends up paying a lot of money to combat such requests, no matter how tenuous the justifications for the request. Lawyers make money, but the lender loses regardless of whether the loan is ever repurchased. As we all know, paying lawyers ranks right up there with coddling terrorists on a list of what most Americans like least to do.

As if Uncle Freddie and Aunt Fannie weren’t generating enough pain through their own efforts, it appears that they’re getting help from private mortgage insurers. Bloomberg reports that many of the insurers are picking every nit they can find to deny insurance claim requests, which, in turn, causes a default under Freddie and Fannie guidelines. It’s loads of fun out there, isn’t it?

The biggest four banks are now the biggest loan servicers. In Fannie’s and Freddie’s world, a putback is made by the GSE to the servicer, who is liable to the GSE for breaches by its predecessors in title to the loan. The servicers are trying to pass the buck back on down the line. I’m sure that they’re finding that’s a futile exercise when the loan originator was one of the many independent mortgage “bucket shops” that has gone to the big mortgage banker graveyard.

To loan originators that are still around and still solvent, the world is a scary place.

Repurchases will be “an issue for the next 24 to 36 months
for all us,” Steven Jacobson,
chief executive officer of
Madison, Wisconsin-based Fairway Independent Mortgage Corp.,
said in a May 24 interview at a conference held in New York by
the Washington-based Mortgage Bankers Association. The company
last year originated more than $3 billion in mortgages. “Any
big bank can put any one of us out of business.”

Guess what: the adage “cleanliness is next to godliness” applies not only to personal hygiene, but, these days, to residential mortgage loan originations, as well.

Y’all have a happy holiday weekend.

Last year, Jamie Dimon called TARP a “Tarp Baby,” which I assume enraged politically correct Uncle Remus haters everywhere. He was talking about the country’s biggest banks at the time. In January of this year, we called it a “roach motel” when discussing how federal bank regulators were making it extremely difficult for community banks to pay back TARP capital. Yesterday, the American Banker (paid subscription required) ran a story that alleged that many community banks that took TARP have apparently been sucked into a black hole from which they may never emerge unless they get lucky and the known universe implodes, killing all life on Earth, at which point nobody will be sweating TARP.

Community banks are finding it extremely difficult to check out of the 18-month-old Troubled Asset Relief Program.

While all of the big banks have repurchased or converted preferred
stock, and two-thirds of the regionals have followed suit, community
banks are expected to hold the vast majority of unpaid Tarp funds on
their balance sheets by the program’s two-year anniversary.

There’s some wailing and gnashing of teeth in the article by commentators (some of whom I actually respect) about how TARP hasn’t fulfilled its intended purpose of spurring lending to small businesses. I think that misses the point that one of the original purposes of TARP was to shore up banks’ balance sheets so that they didn’t fail and drag the entire economy into a hopeless pit of despair. Like the hopeless pit of despair TARP takers now find themselves in. It’s continuing to serve that purpose for a number of community banks.

“The initial reason was to promote lending,” [Kirk] Bailey (CEO of Magna Bank of Memphis] said. “In hindsight, the Tarp money has become defensive capital … and part of that is protection against something cataclysmic. Things are better, but we’re not out of the woods yet.”

No, we’re not, not by a long shot. As other observers quoted in the article state, commercial real estate has severely punished community banks’ balance sheets and will continue to do so in the near future. Thus, those with capital are hanging onto it for deal life and doing everything they can to grab more, which, for community banks, isn’t easy.

Although the TARP program has been in existence for 18 months, the portion of the program for community banks has been around for less time than that. It’s still in its early stages. The fact that politicians screwed it up after the fact caused banks that could afford to pay back the capital to do so as soon as possible. However, it was designed so that below-market dividend rates on the preferred stock purchased by the government would be payable for five years, so banks would have at least that period of time to work out of their problems and return to a position to raise additional capital and redeem the preferred stock (and warrants). The fact that all of the biggest banks, and two-thirds of the regional banks, have already paid back their TARP capital are events that were not initially expected to occur. The fact that smaller banks, who don’t have the same kind of access to capital that the bigger banks do, are sticking with the program is right in line with what was expected to happen and is nothing that should concern, or even surprise, observers.

In that light, the pronouncement by UNC Professor Tony Plath’s that “[a]ll we’ve done is created a bunch of zombie banks” appears to me to be a bit overheated. Not all of the banks who continue to hold TARP capital are “zombies” who won’t ultimately survive. I’m sure there are a number of CEOs of such banks who would be pleased to let Tony know that fact, face-to-face (although I’d advise him to wear a catcher’s mask). If he keeps spouting that line, he may find himself lumped into the same category with Elizabeth Warren and Nouriel Roubini, a category that engenders eye-rolling instead of rapt attention every time someone opens their mouth.

Another issue not discussed in the article is one we touched on in previous posts and in the opening paragraph of this post. In order to repay TARP capital, banks must receive their primary regulator’s approval. Many are not receiving that approval, or are receiving approval only to make partial repayments. Regulators are being as cautious as they can so as not to turn allegedly “zombie” banks into completely inanimate corpses. Expect that caution to continue for near term, as well.