U.S. regulator struggles to gain faulty mortgage data

Fannie Mae's and Freddie Mac's effort to challenge the quality of the riskiest mortgage bonds they own is proving a tough slog despite the power of their federal regulator, according to sources close to the banks and regulator.


Nothing has been heard from the regulator, the Federal Housing Finance Agency, on 64 subpoenas it issued banks in July for detailed information on subprime and other Wall Street mortgage bonds purchased by the U.S. home loan giants at the peak of the housing market.

The delays are fueling suspenseful buzz among investors, who are hoping the top housing regulator’s investigation will help jump start their efforts to prove fault on private-label mortgage securities. Just 20 percent of the information requested by the FHFA has been delivered, with some banks resisting the regulator’s demands, one source said.

Should the FHFA find fault on the securities it would increase pressure on banks to buy back bad mortgages which could result in $90 billion in losses, according to analysts.

“There are people looking at the success the FHFA has in getting the information,” said Scott Buchta, head of investment strategy at Braver Stern Securities in Chicago. “There’s so many people trying to get through the fortress. Once someone gets through the wall, others may pile on.”

Investors have been looking for Fannie Mae and Freddie Mac—powerful investors themselves with leverage over banks—to make inroads with trustees in charge of overseeing bond issues, including release of information. The two owned nearly $150 billion of the bonds as of September, mostly by Freddie Mac.

In dispute are “representations and warranties,” or contractual statements of loan quality. Violations, from home occupancy and appraisal errors to outright fraud, are at the root of a growing investor movement to hold banks accountable for losses, which for Fannie Mae and Freddie Mac have been largely borne by U.S. taxpayers.

Investor outrage has sparked several lawsuits against banks, including those by bond insurer MBIA Inc and some Federal Home Loan Banks. Many more are expected. Getting loan data is only the first step. But trustees have been a hurdle to investors, claiming contracts that govern the securities prevent them from taking action without evidence of reason, and a mandate from 25 percent of trust owners.

“Slowly, information is coming out, and none is positive for banks,” said Bill Frey, president of Greenwich Financial Services. Banks are stalling, he said.

Fannie Mae and Freddie Mac have been more successful in getting banks to buy back loans sold into government-backed securitizations, where they have unique control. They have received $20.9 billion in repurchase proceeds in the 44 months through August, or about 60 percent of what was requested, a government report said.

Sources with a bank and a servicer say the FHFA requests on private mortgage bonds are vast, including data on origination, servicing and related emails. Some data could violate consumer privacy acts, and has to be scrubbed, delaying response time, the sources said.

“It’s a lot of documentation that is a burden to get together, given the volume of loans the banks have” with Fannie Mae and Freddie Mac, said a lawyer working with a subpoena.

FHFA, Freddie Mac and Fannie Mae spokesmen declined to comment on the subpoenas.

Investors in the past year have begun to make some inroads on their own, emboldened in late 2010 by revelations of faulty bank foreclosure practices. In a separate tack, Freddie Mac has partnered with bond giant PIMCO and others to fight for Countrywide loan repurchases by Bank of America, which last month announced a “constructive dialogue” was underway.

Elsewhere, Deutsche Bank AG is fighting JPMorgan Chase & Co to provide more than 500,000 loan files for a group investors that own 99 bonds with mortgages from failed lender Washington Mutual. JPMorgan and the Federal Deposit Insurance Corp. as WaMu’s receiver asked the court to dismiss the case, drawing a memorandum of dispute by Deutsche Bank lawyers, including Talcott Franklin.

Franklin first made a splash last year by rallying at least 125 investors to pool efforts to force trustees to scrutinize loans and servicing practices, and to pursue loan “putbacks.” Investors in Franklin’s RMBS Clearinghouse have ownership in more than a third of the $1.5 trillion RMBS market, and voting rights on some 2,600 mortgage trusts.

“I think you’ll definitely start to see some action there,” said William Callan, president of Declaration Management & Research, a manager of $11 billion in assets and part of Franklin’s clearinghouse.

Author: Al Yoon, Reuters