During the period in which the U.S. housing market was at its apex, regional banks and mortgage companies ("originators") across the country originated an enormous volume of both first- and second-lien residential mortgage loans that soon after origination were typically sold to major national banking institutions ("banks"). In most cases, these mortgage loans were subsequently pooled together by the banks and dispensed with in one of three ways. They were sold to government-sponsored enterprises (GSEs) such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), securitized in structured transactions or sold in bulk whole-loan sales to other permanent investors (the GSEs and other investors are referred to herein as the investors). For a few years, these transactions resulted in tremendous profits for all concerned.
Beginning in late 2006, however, the mortgage loan origination industry began to witness a trickle of repurchase demands made on originators by the banks, primarily in response to buyback demands initiated by the GSEs and other investors against the banks, as well as in response to demands by mortgage insurers that were seeking, as against both the GSEs and the banks, to revoke their insurance policies insuring the mortgage loans. The trickle of buyback demands grew exponentially, so that by late 2009, and continuing through the present, these demands have become a tidal wave sweeping across the mortgage banking industry, with no end in sight.
The GSEs and banks are not just limiting their buyback demands to defaulted mortgage loans. They are also making buyback demands on originators to repurchase mortgage loans that currently may be performing but either have nonmaterial defects or, in the opinion of the GSEs or the banks, may become nonperforming loans at a later date.
The Federal Deposit Insurance Corporation (FDIC) reported that in the fourth quarter of 2009, banks had repurchased $18.8 billion in mortgages from GSEs, as compared to $7.1 billion in the previous quarter. (1) In their respective...