The two large GSEs, or government sponsored enterprises, that provide much of the liquidity to the secondary mortgage market are trying to improve their still misbehaving portfolios. Their underwriting guidelines have been steadily getting stricter which will certainly help, but most of the benefits of that will come later. The home loans currently causing such havoc for them were originated around the peak of the real estate bubble and soon after it spectacularly blew up into small particles. Their efforts are now largely focused on putting the breaks on the losses they are presently enduring.
Mortgage lenders requested to repurchase GSE's delinquent paper
When Fannie Mae and Freddie Mac audit distressed mortgage loans in their books and to their utter disbelief discover that their eligibility and underwriting guidelines have not been adhered to they can request the lenders to buy them back. Or they can ask to be compensated for the incurred losses. Fannie Mae's repurchases amounted to $1.8 billion in the first quarter, while at the same time in 2009 the same action brought in $1.1 billion. Freddie Mac, on the other hand, is to rake in $1.3 billion from distressed mortgage loans it sent back in the first quarter, whereas last year in Q1 it took home $789 million. For both the repurchase pace is obviously accelerating, indicating how feeble the housing market remains.
As mortgage lenders and servicers have to take back loans it saps their financial resources, choking in various degrees their channels of originating new ones. It can be especially harmful to mid-size and small banks whose revenue streams are limited, or heavily dependent on the home loan segment. Large lenders can better absorb Fannie Mae's and Freddie Mac's buy-back requests due to their diversification and sheer size. And should they still manage to stumble, as they obviously can with surprising flair, there is always Uncle Sam only a cell phone call away. Basically, that's why the recently-passed Wall Street reform bill was so sorely needed.
The entire mortgage lending platform is still operating under a big caution flag. The two GSEs are desperate to collect on these repurchases to give them some hope of a better future. These requests, however, suck badly needed energy from home loan providers who some time ago sent them carelessly underwritten paper. According to Freddie Mac, at the end of March around 34% of its unsettled buy-back demands were more than 90 days past due. Many mortgage providers simply lack the capacity to honor their contractual obligations. The weak is trying to get the other weak to pay up, making plain how fluid the situation still is.