Zombies In The House

February 03, 2010

Just when you thought it was starting to be safe again outside, analysts are beginning to tote up the costs facing banks and others from buy-back demands from insurers and Fannie Mae and Freddie Mac.  

With losses still mounting from failing home loans, more and more scrutiny is being applied to the underlying loans and their documentation and underwriting.  When Fannie or Freddie securitize or buy a loan, they require sellers to warrant that they have followed all the guidelines required by the companies.  When bond insurers or mortgage insurers write policies on mortgages or bonds backed by them, they do the same.

With billions at stake, it’s not surprising that these lenders are going over files with a fine-toothed comb, looking for any opportunity to force the originator to make good on their promise to buy back faulty loans.  A recent Housing Wire article calls this a “$10 billion problem.”  Best quote is from Chris Whelan, Managing Director at Institutional Risk Analytics:

“The wave of loan repurchase demands on securitization sponsors is the next area of fun in the zombie dance party, namely the part where different zombies start to eat each other.”