A growing drag on bank earnings are bad mortgages that they are being forced to repurchase from Fannie Mae and Freddie Mac. According to The Economist ("Return to lender," 2/6/2010), these buybacks totalled $14.2 billion in the first 9 months of 2009, four times the amount in the same period of 2008, and probably have accelerated in the intervening months. This is just the tip of the iceberg. The amount of "seriously delinquent" mortgages at Fannie and Freddie stands at $300 billion and is "rising sharply."
Banks are resisting, claiming that they are not legally bound to make such buybacks. Fannie and Freddie point to irregularities in the loan documents that the banks let slide. Besides, the banks fear that, if they don't play ball, Fannie and Freddie will stop buying mortgages from them.
The FHA is also in the act of loan putbacks, as are private mortgage insurers like Radian and MGIC. Likewise, according to The Wall Street Journal ("Mortgage Suit Targets the Street," 2/16/10) the Federal Home Loan Bank of Seattle has filed 11 separate lawsuits against the likes of Goldman Sachs, JPMorgan Chase and Bank of America, trying to force them to repurchase around $4 billion of MBS that have tanked in value, alleging misleading representations about their quality when issued.