Fannie, Freddie To Pursue Putbacks, Subpoena JPMorgan, Among Others, In Seeking Loan Level Detail

Tyler Durden's picture

First it was the New York Fed, now the FHFA itself (regulators of Fannie and Freddie) is getting involved in putbacks. The WSJ has just reported that the GSEs have hired law firm Quinn Emanuel as the "agency considers how to move forward with efforts to recoup billions of
dollars on soured mortgage-backed securities purchased from banks and
Wall Street firms... The FHFA hasn't disclosed the targets of its subpoenas, though some
banks have acknowledged receiving them, including J.P. Morgan Chase
& Co.
The probe is focused on so-called private-label securities
that were originated by mortgage companies, packaged by Wall Street
firms and then sold to investors." Not to be confused with RoboSigning, which is at the heart of the Fraudclosure and could serve as a catalyst to what some claim as the unwind of the multi-trillion MBS market in a worst case scenario, this is a parallel effort that seeks to get banks to repurchase far more of misrepped and miswarrantied mortgages. As we previously disclosed, it is precisely this ongoing action that Bank of America and Wells Fargo have been (under)reserving against: and if the GSEs, together with the FRBNY, Pimco, BlackRock and who knows who else, are sensing the current moment as one of terminal weakness for the mortgage servicers, who knows how many billions in mortgages could be putback to the TBTF banks, who are luckily flush with still fresh taxpayer cash and trillions in excess reserves. Either way, it appears that while the New York Fed is going after BofA, the GSEs are about to dine on Jamie Dimon. Either that, or all this is a smokescreen to promptly settle all current and future possible litigation in an adversarial process involving government entities, and thus streamlined to a mutually amicable resolution.

More from the WSJ:

The FHFA's efforts could ultimately lead to a settlement that would avoid protracted legal battles, analysts said.

"There's going to be much more incentive to negotiate seriously and quickly than if they had done this seven months ago, when people were blithely ignoring the fraud," says William K. Black, a former federal bank regulator who is now an associate professor at the University of Missouri-Kansas City School of Law.

Estimates about banks' ultimate exposure vary considerably because it isn't clear how aggressively investors will pursue claims, or how successful they will be. Banks could face between $55 billion and $179 billion in repurchase demands from investors, according to Compass Point Research & Trading, a Washington boutique investment bank. Estimates from FBR Capital Markets say repurchase demands could be lower, between $24 billion and $51 billion.

The FHFA subpoenas could mark the beginning of a new attempt to recover losses on soured mortgages from banks.

Of course, the GSEs' involvement in this mess could open them up even wider to potential liability:

So far, most efforts to force banks to repurchase mortgages have focused on mortgages that Fannie and Freddie bought and guaranteed themselves, and not from mortgage securities issued by Wall Street firms.

The mortgage giants are sorting through their growing pile of delinquent loans to find sloppy or fraudulent loan underwriting that constitutes a violation of representations and warranties.

Those repurchase demands have risen as delinquencies mushroomed. Fannie and Freddie have put back $6 billion in mortgages during the first half of the year, and banks could face another $22 billion through 2012, according to a report published Tuesday by analysts at RBS Securities Inc. Banks, for their part, have grown more aggressive in recent months in challenging those put-back efforts.

For those unsure how the GSEs can pursue legal action against banks for basically doing their work for them, the WSJ explains:

While Fannie and Freddie don't make loans directly, they support housing markets by buying mortgages from banks and then selling them to investors as securities, providing guarantees. But during the housing boom, Fannie and Freddie augmented their role in the housing market by purchasing privately issued securities as investments. They became two of the largest investors in those bonds.

Those securities were often backed by subprime loans and mortgages that required little or no documentation of borrower incomes, which deteriorated sharply once home prices fell. Fannie and Freddie couldn't purchase those loans directly, but they were allowed to invest in slices of the securities that carried triple-A ratings.

Fannie and Freddie purchased $227 billion of bonds backed by subprime and other risky loans in 2006 and 2007. The value of those securities plunged as the housing boom turned to bust, and losses have accounted for around 9% of the firms' capital hole. So far, the government has injected $148 billion to keep the mortgage giants afloat.

So why subpoenas?

Some analysts say Fannie and Freddie, which touted their unparalleled mortgage-market expertise, could be hard-pressed to argue that they didn't know what they were buying.

But the subpoenas could help Fannie and Freddie access loan files for the mortgages backing their bonds and to demonstrate that the loans didn't conform to underwriting guidelines.

The loan files "are really the Holy Grail here," says David Grais, a New York securities lawyer who represents the Federal Home Loan Banks of San Francisco and Seattle, which have sued Wall Street firms to buy back soured mortgage securities.

Difficulty obtaining those loan files is one reason why there have been so few efforts by investors to force repurchases so far. Investors need to access the loan files to determine if there has been a specific violation of certain contracts, but they can't petition trustees for loan pools to take action without first identifying that breach.

"It's a real Catch-22 for them," says Isaac Gradman, a San Francisco-based consultant.

Subpoenaing is a uniquely FHFA-based privilege, which however will likely open up a can of worms once all the heretofore private data enters the public domain:

If the FHFA is successful in proving that loan files didn't meet
underwriting standards or that their ownership chain wasn't properly
transferred during the securitization process, that could pave the way
for other investors to make similar challenges, said Joshua Rosner of
investment-research firm Graham Fisher & Co.

No matter how this particular storyline developes, one thing is certain: in the nearly $14 trillion US mortgage market, things will get heated. Throw in midterm elections in some angry politicians, and it will get really interestng.

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Jeffrey Lebowski's picture

Just before a ship sinks, all the RATS jump off


After you, Mr. Bernanke

erik's picture

maybe H&R Block got one too.  it'll be neat to see what happens to a NTBTF.  their 5 yr CDS hit 820 today.  right in line with Greece & Argentina.

jeff montanye's picture

reminds me of the tobacco companies that never lost a case, until they did.

Careless Whisper's picture

when the banks loose, they win. mortgages (mbs) are "insured" with credit default swaps. i suspect that for every mortgage default, it is paid for, about ten times.

does anyone have data on the amount of swaps sold on mbs?


kaiserhoff's picture

Deja vu, all over again.  The counter-party, which may well be AIG won't be solvent.

Spigot's picture

Howsomeever, the CDS insurers (to parties including GSEs, together with the FRBNY, Pimco, BlackRock and who knows who else) have to pay and pay and pay, my friends :-)

snowball777's picture

The size of the CDS market was ~$55T at the time of the crisis according to the ISDA.

Herd Redirection Committee's picture

Yep, we are seeing it on the international level with the lack of global agreement on currencies.  Every one knows this is the time to rewrite the rules.  In Germany they are becoming agitated and questioning everything as a result, incl. giving up the benefits of devalued currency that they currently enjoy as the strongest member in the EU

We will see the oligarchs turn on each other more and more, although currently the fear that others will drag you down with them is keeping the charade going for now.  But things have a way of speeding up exponentially, and I'm not just talking about currency debasement.

Any way, check out the new site, PsychoNews,   where we like to point fingers and call things as we see 'em

Larry Darrell's picture

LOL............sorry Herd, but it looks like the Ministry of Truth doesn't want your facts posted

From the site:

Website Under Review

You are seeing this page because the system administrator of is currently checking this website for malicious content


Herd Redirection Committee's picture

Luckily there still exists some semblance of Free Speech and universal human rights, and after about 24 hours of 'review' we are back online, w/o so much as a peep from the host, why the site was 'under review'!!!  We must be doing something right!



pan-the-ist's picture

It's too bad this movement was co-opted, or TARP2 would never happen:

(sorry for the huffpo link, I knew it will hurt a few eyes here.)

SheepDog-One's picture

Already priced in and leveraged now what?

Glass Steagall's picture

This is a fucking farce.

50 trillion dollars world wide chasing 150 trillion plus in derivatives...

Gimme a fucking break.

Unwind all you want. The jig is up.

jomama's picture

luckily, 99%+ of people simply are not paying attention.

Spalding_Smailes's picture


The rug just got stapled to the floor .... Lol' Now what ....?

Mr Lennon Hendrix's picture

Harry saw the futures go red and needs a moment to go get his bear costume on.

MayIMommaDogFace2theBananaPatch's picture

Zed?  It's Maynard.  The spider just caught a coupl'a flies.

Spalding_Smailes's picture



Sausagemaker's picture

What now? Let me tell you "what now". I'm gonna call a couple of hard, pipe-hitting Feds to go to work on the homes here with a pair of subpoenas and a ink jet. [to Zed] You hear me talking, hillbilly boy?! I ain't through with you by a damn sight! I'm gonna get hyper-inflationary on your ass!

Mr Lennon Hendrix's picture

"I'm gonna get hyper-inflationary on your ass!"


JLee2027's picture

Harry saw the futures go red and needs a moment to go get his bear costume on.


Milestones's picture

Thanks for the morning laugh. No coffee involved fortunately.  Milestones

johngaltfla's picture

Nah. It's priced in and besides, all the paper is AAA. The ratings agencies told us so.

f16hoser's picture

I would love to see "Zombie Banks" feeding on each other! That would be worth the price of admission!

whatsinaname's picture

ought to get new homebuyers mighty excited eh?

snowball777's picture

About my prospects to buy several years from now, yes.

MachoMan's picture

Hopefully you pick the right currency pony and can manage to keep enough of it around to take advantage of deleveraging.

Karl Yentz's picture

Big fat smoke screen for the biggest fleecing of Amerika yet to come!

Punderoso's picture

I have seen this math somewhere before.  Wasn't it used by the BLS for determing the unemployment rate? Oh wait, this was used for projecting the costs of Obamacare. No, I got it, this is how you calculate how many jobs that were saved or created!

JLee2027's picture

Big fat smoke screen for the biggest fleecing of Amerika yet to come!

You can only fleece the uninformed and/or greedy.  You cannot fleece the alerted and angry muther fuckers we have become.

MachoMan's picture

what about 95% of americans were opposed to tarp do you not understand?

carbonmutant's picture

Dennis Kneale says it's just a paperwork error...

tallystick's picture

Back in 2009, Dennis Kneale said the same mortgage was sold multiple times into different MBS.

Spalding_Smailes's picture

Whatever rising anger Eisman felt was offset by the man’s genial disposition. Not only did he not mind that Eisman took a dim view of his C.D.O.’s; he saw it as a basis for friendship. “Then he said something that blew my mind,” Eisman tells me. “He says, ‘I love guys like you who short my market. Without you, I don’t have anything to buy.’ ”


That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”

StychoKiller's picture

The holders of all those CDSs are gonna be like a Gahan Wilson cartoon I once saw, in which there's a single soldier standing in the rubble after a holocaust:  "I won!  I think..."

Plainview's picture

Great excerpt Spalding; what a completely absurd situation.

trav7777's picture

I wrote several lengthy pieces on synthetic debt over on TF back in 2008.

Synthetic debt became the only way to drive credit growth; a CDS is kind of like a reverse bond except with no initial capital.

Miles Kendig's picture

Another top pick from Denice The Menace

pan-the-ist's picture

WOOT!1!!! Get 'em Freddie, you too Fannie!!!