RealtyTrac Opines On The Coming Wave Of GSE Foreclosure Buybacks: "The Final Liability Will Be Enormous"

Tyler Durden's picture

As if an insolvent Europe was not enough (and everything seemed so good one short month ago), foreclosure expert firm RealtyTrac opines on the issue of fraudclosure and just how big the impact will be on the GSEs, and thus, on the upstream lenders who sold Fannie and Freddie MBS that had material misrepresentations. Add this to the over 240,000 REO properties held by the GSEs, and one can see why Jim Saccacio, CEO of RealtyTrac says: "Not only do the GSEs have an REO problem, they also have a guarantee problem because they promised to make good on the securities they sold to mortgage investors. The potential liability of the GSEs is a matter of debate but there's little doubt that the final total will be enormous.” Oops.

And just how enormous? We have previously summarized various third party estimates, but here it is courtesy of RealtyTrac, all compiled in a tidy little package:

Some of the loss estimates are astronomical.

  • The Federal Housing Finance Agency
    (FHFA) says Fannie Mae and Freddie Mac have borrowed $148 billion to
    date from the Treasury but that additional draws could range “from $221
    billion to $363 billion through 2013.” 
  • Credit Suisse says
    Fannie Mae and Freddie Mac could face $321 billion in losses if home
    values decline by 10 percent in a year, are flat the next year and rise 3
    percent annually thereafter. Of course, if things don't go so well then
    the losses could amount to $448 billion. 
  • Standard & Poor's
    says “the ultimate taxpayer cost to resolve Fannie Mae and Freddie Mac
    could reach $280 billion, including the $148 billion already invested —
    money largely spent to make good on loans gone bad.” Things could get
    worse, however. S&P says that $280 billion “could swell to $685
    billion, by our estimate, with the establishment of a new entity to
    replace Fannie and Freddie that the government would initially

To put these numbers in context consider that in the second quarter of 2010
all of the nation's banks jointly earned $21.6 billion in “profits” —
earnings which were achieved in part because loss reserves were reduced
by $27.1 billion when compared with a year earlier.

As we have been skeptically saying since the loss reserve gimmick started being prevalent in Q2, look for the loss reserve estimates to reverse course. And since these impact EPS not by absolute value but by the change in value, should loss reserves merely retrace the "improvement" from a year ago, look for Wall Street to suddenly go from profitable to losing $6 billion all over again (not that this would impair the payout of record banker bonuses obviously).

As for the question of who ultimately ends up footing the bill, please refer to your nearest mirror: should the GSEs be forced in their pursuit of fiduciary duty to put back hundreds of billions of mortgages to the BofA's of the world (because the GSEs are after all nationalized entities, and any exposed fraud must be investigated, Tim Geithner's protests notwithstanding), the banks will have no choice but to resort to TARP 2 and more rounds of capital raising. After all, the new stress test plan has already been launched - it is the Treasury's hope that BAC and WFC will be able to capitalize on a successful "passage" and raise some equity capital before the entire MBS buyback fiasco goes nuclear some time in H1 2011.

From RealtyTrac:

Who Pays?
If Fannie Mae and Freddie Mac are facing vast losses on the mortgages they bought then do they have any claims against the lenders who sold such loans? Can they force private-sector lenders to buy back failed mortgages?

Fannie Mae and Freddie Mac were taken over by the federal government in the summer of 2008. They are now operated by the Federal Housing Finance Agency (FHFA), a governmental entity that in July issued 64 subpoenas “to determine whether misrepresentations, breaches of warranties or other acts or omissions” were made by lenders who sold loans to Fannie Mae and Freddie Mac.
And just what documents does the government want? It's “seeking the contents of loan files, which include documents used in the underwriting process, such as loan applications and property appraisals.”
The potential for lender buybacks has not gone unnoticed and it involves not just Fannie Mae and Freddie Mac. The biggest case so far concerns the Maine State Retirement System and other mortgage investors who sued the Bank of America — the successor to Countrywide Financial — claiming that loans worth $352 billion should be bought back at face value. The suit has just been dismissed — but “without prejudice,” meaning it can be re-filed. As a result of the dismissal, says Bank of America, its liability has been reduced to not more than $31 billion — a sum greater than the profits of the entire banking system in the second quarter.

Meanwhile, other claims loom. As examples, the Federal Reserve Bank of New York and several large investors want Bank of America to buy back mortgage-related securities worth $47 billion. On the West coast, the Federal Home Loan Bank of Seattle has sued 11 lenders, seeking buybacks worth $4 billion.

In one suit, the bank alleges that a mortgage seller “made numerous statements to the plaintiff about the certificate and the credit quality of the mortgage loans that backed it. Many of those statements were untrue. Moreover, the defendants omitted to state many material facts that were necessary in order to make their statements not misleading.”
How much, if anything, mortgage investors can get back from loan originators and packagers is unknown. A report from Goldman Sachs says the nation's four largest banks will likely need $26 billion to cover “putback” claims during the next few years — that's $15.5 billion for the Bank of America, $5.3 billion for JPMorgan Chase, $2.2 billion for CitiGroup and $3 billion for Wells Fargo. The number for JPMorgan Chase could grow by an additional $3.5 billion if more loans from its Washington Mutual subsidiary do not work out. Whatever the case, the numbers suggested by Goldman Sachs can be easily absorbed by the larger banks.

But what if mortgage investor claims are more successful? What if settlements and remedies against dozens of lenders and Wall Street firms amount to hundreds of billions of dollars? Or more? Massive losses will need to be written off immediately so it will no longer make sense for lenders to have a foreclosure inventory or to wait for higher prices. Instead — under inevitably new management — the fresh strategy will be to clean up the books, dump REOs, speed short sales, blame old management, regain public confidence and move on.

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TheGreatPonzi's picture

Don't worry. Ben will print a few trillions, and it will be like nothing ever happened.

snowball777's picture

Well let's hope the Bank of Lynching America's cheeks get spread CountryWide on this one.

trav7777's picture

I'm sure the Treasury has booked these FNRE loans as "income"

skyr191's picture

when it rains it pours.... 

midtowng's picture

The numbers are enormous. I don't see how this is resolved without either another TARP or a few TBTF banks going under, or both.

RockyRacoon's picture

Surely Congress can solve this problem to the satisfaction of everyone -- except the taxpayer.

TheGreatPonzi's picture

Talking about real estate, there's an interesting phenomenon to watch right now. Sales have collapsed Y/Y (about 25% nationwide), but prices followed by only half of the drop. Same phenomenon on average listing price VS average sales price. Almost 50% of difference.

There is no buyer, and owners don't seem to be in a rush about selling (or they just don't want to accept the drop).

SheepDog-One's picture

FED supporting at least $1.2 trillion in MBS purchases.

flattrader's picture


They don't want to accept the drop.

"They" being owners who can still afford their mortagage but want to ditch their house and at least "break even".

"They" being banks who are still desperately trying to hide the shadow inventory.

This is from July of this year-

Lots of listing being pulled off the market (in my area) as we head into the winter months.

That chart above will look so much worse next year.

I don't know how long the can conceal the shadow inventory.  There approximatley 40 mos. going forward as it is.

eatthebanksters's picture

Most seller's can't cut their asking prices to where they need to be to sell they'd be underwater...The majority of the deals that seem to be getting done are distressed transactions, and that's is a bad omen for the future of the means more downward pessure on prices...look at recent solds in the MLS, that always is what tells the story.

economessed's picture

But.....the banks said this was just a clerical error.  Did we stop manufacturing "White-Out?"  Can't we just fix some signatures and get on with the recovery so we can pay bonuses to these geniuses?

StychoKiller's picture

Ya know it's bad when ya have to apply white-out with a spary gun! :>D

57-71's picture

I'm waiting for some enterprising soul to manufacture a series of documents to sue for a billion. And get the award!

SwingForce's picture

Dump REO's ha ha, that's a good one. Regain public confidence?, oh ho, stop it, I'm dyin' over here.

dbach's picture

Seems like a good time to expand the Fed's purchase program to MBS, then they can bury that worthless paper with the negative real return on the tbills they've been snatching up. The Fed's balance sheet can be a kennel where we dump all mistakes.

Fidel Sarcastro's picture

dbach - Isn't that what's happening now?  Then the Fed can buy up all the worthless debt of cities, states & municipalities. Debt?  What's that? Just send it to Benron.


dbach's picture

i meant in terms of QEII, they do have a lot of MBS on the balance sheet already. and yeah muni debt might be next too.

honest question - if the fed loses money, how does that get rectified? ie they buy 'assets' and they turn out to be worthless, is there any way to balance that out? on the t account A=0, liabilities=the money printed, is there equity that gets blown up?

i've been researching around and i haven't found anything clearly discussing the Fed's accounting and structure, if anyone has a resource i'd be interested

merehuman's picture

More Bull  Shit   MBS by any other name..

doolittlegeorge's picture

you appear to be strategizing with Mr's Gross and El-Arian because this would appear to be exactly what they believe in.  "It ain't easy for the Fed to give up that ring of power"  Needless to say "the hundred of billions the Fed has made and believe they will continue to make goes directly into the US treasury and government programs."  In short "there is no private wealth being created here but public largesse instead."  Obviously "public largesse requires large sums of capital to maintain."

Captain Kink's picture

it already is.  the Fed is the "bad bank"

Don Levit's picture


The GSEs are the lowest of 4 levels of government obligations.

They are on the same level as future Social Security benefits, future Medicare Part A benefits, future Medicare Part B benefits, and future Medicare Part D benefits.

The highest level of obligation  -  Publicly held debt, Military and civilian pension and post-retirement health, Veterans benefits, environmental and disposal liabilities, and loan guarantees.

See the paper entitled "Fedearal Debt, Answers to Frequently Asked Qusetions, an Update," published by the GAO.

Go to pages 65 and 66.

Don Levit

packman's picture

The GSEs are the lowest of 4 levels of government obligations.

They are on the same level as future Social Security benefits, future Medicare Part A benefits, future Medicare Part B benefits, and future Medicare Part D benefits.

You're talking accounting.  Politics trumps accounting - every time.

Plus don't forget scale.  The scale of SS & Medicare obligations is 10x that of the GSEs.  Bailing out the GSEs costs next to nothing compared with SS & Medicare, thus is a lot more politically expedient.


tahoebumsmith's picture

They are all sleeping in the same bed so nothing will happen. Fannie & Freddie will write them off and put it on the back of the taxpayers just like they do every quarter when they lose billions. It was Obama that said he would give indefinite support to Fannie and Freddie wasn't it? They already got it baked into the cake, this way they can let the CRONIES continue on with their robbery and leave us holding the bag. Kind of the same way AIG funneled all the cash in form of CDS to cover the mortage losses, Fannie and Freddie will be set up the same way, another backdoor bailout!

Hondo's picture

Those entities equity and debt need to be wiped out and haircuts taken.  Absolutely insane that that hasn't been done yet.

SheepDog-One's picture

The whole country and everyone in it being destroyed so a few people dont have to take a haircut for their scheme that has blown up? Preposterous, even a 3rd world banana republics people wouldnt stand for such an outrage! Make them eat their losses, seize all their assets for auction, get it over with!

Comrade de Chaos's picture

Just a small correction... "everything seemed so good just two weeks ago."  :)

Implicit simplicit's picture

Come one, come all to the greatest circus show on earth.

Watch terrified as the Us economy balances itself precariously on an illusuinary tripod of RE, banks, and the Fed.

 Below them 14 trillion dollars of debt and growing of fiat currencie quicksand.

Houdini himself would have been awestruck by the ability of the goverment to fool the people for soo long, while they pickpocketed the middle class show attendees.

jal's picture


Its not news. You have not been paying attention to the news. Here are some old news items. 


Crisis Leftovers: Fannie, Freddie Force More Mortgage Buybacks


March 6, 2010


Fannie Mae and Freddie Mac are forcing the nation’s biggest lenders to buy back more of the badly-written mortgages that served as a trigger for the financial crisis, and a dash for cash has ensued.


The government-controlled mortgage finance giants Fannie and Freddie could force some of the top lenders – including Bank of America, JPMorgan Chase, Wells Fargo and Citigroup – to buy back $21 billion of home loans this year as part of its housecleaning of souring mortgages.


Fannie Mae and Freddie Mac are among firms seeking to force banks to take back defective mortgages, especially those written during the peak of the housing boom, after defaults helped push the two federally backed firms and some insurers to the brink of collapse.


Fannie and Freddie forced the four largest U.S. banks with buybacks in 2009 amounting to about $5 billion in losses, according to recent company filings.




BofA May Owe $20 Billion in Mortgage Buybacks, Insurers Say 


By Hugh Son - Sep 13, 2010


Ned Zeppelin's picture

Let us all learn more about the fact that "mortgage-backed" securities are really "not backed by mortgages" securities:

belogical's picture

Not that there is anyway to collect, but I have often wondered that if fraud is proven in MBS and loan origination, than anyone who owns a home who had their equity drop as a result, may have cause to blame(legally?) the banks and there by seek damages.

Not a lawyer but I have wondered

MachoMan's picture

No.  Credit is a double edged sword.  Any increases and/or value that the home had was the result of credit.  Any loss was also the result of credit.  In other words, it was the same function that was responsible for the loss and the gain.  As a result, the suing party is left with the legal position that any gain should inure to his benefit while any loss should be born by another party.  Can't eat your cake and have it too.  No one wants to admit the speculative nature of purchasing assets... 

The other issue is privity.  Essentially, the person who is responsible for the run-up in credit (and subsequent run-up in housing prices) is not the same person who sold you your house and made no representations to you regarding the value of your house.  In other words, another way to skin the cat would be to show that the price you purchased the house was inflated and the market conditions presented by greenspan/bennie lead you into a false sense of safety.  The problem is that your own stupidity is not a cause of action.

I also am guessing governmental immunity is going to play an intricate role.  I'm not sure why the banks wouldn't simply invoke sovereign immunity...  hell, they're just arms of the state, either directly through ownership or indirectly through backstops.

Maybe you can get there on a really, really involved civil conspiracy charge.  But, if you can connect all those dots, then we will have already descended into the darkness.

carbonmutant's picture

As long as CNBC doesn't say anything about it we're cool...

redpill's picture

4 million+ foreclosures since 2005, worth $700B.  Wonder how much of that we will all wind up paying.

sbenard's picture

Market to Obama:


carbon based unit's picture

question ... the banks were previously propping their balance sheets' at quarter-end by using the repo market to temporarily mask just how deplorable their holdings were.  this was popularized by the infamous so-called repo-105 transactions at the esteemed LEH.  then they all got called out by zero-hedge and others revealing that all the banks were doing this sort of thing.  does anyone know if this practice has ended?  i'm just wondering if, since they might not be able to get away with the repo-105 charade, whether the loss-reserve draw-down is the replacement gimmick, enacted out of desperation for something to prop up the rationalization for the ongoing bonus scam.

doolittlegeorge's picture

damn good question, too.  "If your equity trades are coming all in on the positive side for both you and your firm then clearly you are taking money not just from someone else but from many-else."  From whence come the losses?  Somewhere in your own firm?  The technical term is "internal controls."  We skipped this in 2008 and went directly to "disintermediation"--with the real bad boys "looking to see if there would be a breakdown in the internal controls of the Federal Government itself."  As it was this did not occur and indeed "there suddenly appeared a controlling legal authority" in the form of Hank Paulson et al. and an extraordinary "bailout" (called TARP) for lack of a better term.  Of course "for two years now we've been hosing our economy with free money from the Fed."  This is a POWERFUL prophylactic, no?  Of course as any girl will tell you "prophylactics have there limitations."  Eventually "the economy becomes real" whether good, bad or indifferent.  Needless to say "Europe is attempting this Walk on the Wild Side and not doing it very well."  Indeed "does the EU have any internal controls whatsover?"  Imagine for a moment "being the recipient of that actual MONEY and not mere largesse."

tony bonn's picture

looks like another fuck you for the taxpayers....

those god damned terrorists at the gses should be executed - capital punishment - for fraud, terrorism, and inhumanity. they are evil scum.....and then chris dodd and barney frank should executed....i am so sick of those pieces of shit i could run a pitch fork up frank's oversized asshole.

Eastwood's picture

Cats and dogs, living together. Mass hysteria.  The problem with predicting the end of the world is that you'll have no one on the other side of the trade to collect from when you're right.

MachoMan's picture

"yeah, but you just trade the change in prices before collapse" - eye roll-

MachoMan's picture

double the pleasure, double the fun

Djirk's picture

Stop worrying, Obama can pay that off with the profits he made from the bank bailouts and the "investment" in GM....cough cough

sasebo's picture

Makes me think of my old grandpaw back in Mississippi in the 30's & 40's plowing his corn field with a mule. Some one asked grandpaw one day what was the hardest part of plowing with a mule. Grandpaw said, "getting it's attention" They then asked, "well grandpaw how do you get a mule's attention?" Grandpaw replied, "that's easy, you just hit it in the head with a two-by-four."

We just haven't gotten the attention of the fat cats running the banks & government. I can assure you one day we will. And just like hitting a mule in the head with a two-by-four, it won't be pretty.


jmc8888's picture

Actually it's 0 liability after Glass/Steagall

The question is, how do the Banks balance sheets look after it's zeroed?