GSEs Concerned Servicers Can't Honor Repurchase Obligations

Fannie Mae and Freddie Mac are becoming increasingly concerned that mortgage servicers will not be able to honor their obligations to repurchase bad loans. Fannie expects repurchase and reimbursement requests will remain high in 2009 and into 2010 and it already has a significant number of requests that have not been paid. "Due to the current housing and economic environment and the adverse impact on our servicers, we may be unable to recover outstanding loan repurchase and reimbursement obligations resulting from breaches of representations and warranties," Fannie says in its third-quarter financial statement. Fannie does not disclose the amount it collects from servicers. But Freddie Mac reported that its servicers have repurchased $2.7 billion in bad loans during the first three quarters of 2009, including $960 million in the third quarter. "Our exposure to seller/servicers could lead to default rates that exceed our current estimates and could cause our losses to be significantly higher than those estimated within our loan loss reserves," Freddie says in its third-quarter financial statement. Lenders that sell loans to Freddie and Fannie are required to make representations and warrantees that the loans comply with the government-sponsored enterprises' underwriting requirements. If the loans don't perform as expected and underwriting deficiencies are flagged, the lender is obligated to buyback the loan.