Regulator says banks slow to buy back bad loans

By ALAN ZIBEL, AP Real Estate Writer

WASHINGTON (AP) - A federal regulator is criticizing banks for failing to take back bad mortgages sold to giant mortgage buyers Fannie Mae and Freddie Mac.

Edward DeMarco, acting director of the Federal Housing Finance Agency, says in testimony prepared for a House subcommittee hearing Thursday that the two government-controlled companies had tried to send more than $11 billion in bad loans back to lenders as of this summer, but have met resistance.

A third of those requests have been outstanding for at least three months. DeMarco said delays by lenders in repurchasing these loans are a "significant concern."

Investors who buy loans from banks have the right to force lenders to repurchase them if they later discover fraudulent statements on loan applications.

Fannie and Freddie buy mortgages and package them into securities with a guarantee against default. They have ensured that millions of Americans can get home loans - even after the housing market collapsed.

The two companies, the Federal Housing Administration and the Veterans Administration together backed about 90 percent of loans made in the first half of the year, according to trade publication Inside Mortgage Finance.

The mortgage giants profited tremendously during good times but burdened taxpayers with huge losses when the housing market went bust. Their near-failure two years ago has cost taxpayers $148 billion to date, and the rescue is on track to be the most expensive piece of the effort to stabilize the financial system.

The Obama administration has been working on a plan for Fannie and Freddie, but officials don't plan to release details until next year.

The companies "will not exist in the same form as they did in the past," Michael Barr, an assistant Treasury secretary, said in remarks prepared for the committee hearing.

Figuring out what to do about Fannie and Freddie is a divisive issue on Capitol Hill, and it could grow more difficult if Republicans take control of one or both houses of Congress.

Republicans have seized on the administration's management of Fannie and Freddie to illustrate Democrats' push for broadening the reach of the federal government. Barr, however, noted that the loans acquired by Fannie and Freddie before their September 2008 takeover "are the overwhelming source of losses."

One option for the two companies that has dominated the discussion in recent months is for the government to collect money from the mortgage industry and set up an insurance fund that could be used to cover losses during a severe downturn.

DeMarco, however, raised doubts about whether that form of federal support would work. If the government does not charge enough money for its guarantee, he noted, "taxpayers eventually may foot the bill again."

(Copyright 2010 by The Associated Press. All Rights Reserved.)