An Elephant Stampede
Bank Lawyer’s Blog:
Two and one-half years ago, we were talking about an "elephant in the room" for the mortgage banking business: loan repurchase obligations. In November 2005, the problem was primarily with respect to subprime mortgage loans. Today, according to The Wall Street Journal, the elephant is stomping throughout the house, smashing furniture in every room, and leaving a memento of his presence on every loan originator’s favorite sofa cushions.
Already burned by bad mortgages on their books, lenders now are feeling rising heat from loans they sold to investors.
Unhappy buyers of subprime mortgages, home-equity
loans and other real-estate loans are trying to force banks and
mortgage companies to repurchase a growing pile of troubled loans. The
pressure is the result of provisions in many loan sales that require
lenders to take back loans that default unusually fast or contained
mistakes or fraud.
The potential liability from the growing number of disputed loans could
reach billions of dollars, says Paul J. Miller Jr., an analyst with
Friedman, Billings, Ramsey & Co. Some major lenders are setting
aside large reserves to cover potential repurchases.
[...]
The fight over mortgages that lenders thought they had
largely offloaded is another reminder of the deterioration of lending
standards that helped contribute to the worst housing bust in decades.
Such disputes began to emerge publicly in 2006 as
large numbers of subprime mortgages began going bad shortly after
origination. In recent months, these skirmishes have expanded to
include home-equity loans and mortgages made to borrowers with
relatively good credit, as well as subprime loans that went bad after
borrowers made several payments.
Many recent loan disputes involve allegations of bogus
appraisals, inflated borrower incomes and other misrepresentations made
at the time the loans were originated. Some of the disputes are
spilling into the courtroom, and the potential liability is likely…