In the aftermath of the financial crisis, Fannie Mae and Freddie Mac aggressively demanded Wall Street and big bank aggregators (“aggregators”) repurchase millions of defaulted and distressed loans, due to purported breaches of representations, warranties and covenants. In the past few years, there have been several blockbuster settlements with the government-sponsored enterprises (GSEs), such as Citigroup’s 2013 settlement with Fannie Mae in which it agreed to pay Fannie Mae $968 million to resolve existing and potential future mortgage repurchase claims on loans sold to the U.S. mortgage guarantor between 2000 and 2012. Similarly, Bank of America, Wells Fargo, and JPMorgan Chase also settled with the GSEs.

Maintaining Business Relationships

At the time of Citi’s settlement, Jane Fraser, CEO of CitiMortgage, said in a statement “[w]e have a strong and productive relationship with Fannie Mae.” In a similar statement, Bradley Lerman, Executive Vice President and General Counsel of Fannie Mae, commented that the “resolution is an example of our desire to work together with our business partners to find common ground.” Mr. Lerman added that the agreement” compensates taxpayers for losses, and allows Fannie Mae and Citigroup to move forward and strengthen [their] business relationship.”

Clearly, this is not a change of position for the aggregators. We have long believed that in acquiescing to Fannie Mae and Freddie Mac’s often unjustified and overreaching repurchase and make-whole demands, the big banks were focused far more on preserving business relationships than on the legal merits (or lack thereof) of the GSE’s claims. Indeed, it is often plainly apparent the aggregators have done nothing at all to investigate or research, much less defend against, the demands made on them by an agency.

How much of the big banks’ mega-payments under the GSE global settlements were applicable to loans that an originator sold to the Aggregator?

Several aggregators continue to assert that while they have settled with the GSEs, those settlements have no relevance to the demands they are making against the originators on the very same loans.

Moreover, these large settlements typically consider, as part of the settlement amount, all funds  previously paid by the aggregators to Freddie Mac and Fannie Mae for repurchased mortgage loans. In other words, while the aggregators may claim to have paid the GSEs the full repurchase price on such loans, they in effect had previously only made down payments on their ultimate settlement amounts. Once the overall payment amount is measured against the total number of loans settled (including those payments made prior to the global settlement), the average payment per loan is, of course, far from the full aggregate repurchase price for all loans.

Moreover, it appears that by and large these settlements did not specifically allocate the overall settlement amount to each of the millions of loans being settled (and many of these settlements included future and thus unknown claims). Thus, if an aggregator thereafter made a repurchase demand on an originator for, say, the Smith loan, it is exceedingly difficult for the aggregator to demonstrate the amount of the actual out-of-pocket loss, if any, it incurred on that loan.

It is troubling, but sadly not surprising that aggregators that entered into global settlements with the GSEs have of late been making repurchase demands upon mortgage originators and including so-called “loss statements” for the full amount of the “repurchase price” (i.e., the make-whole based on the full unpaid balance of the loan, less any proceeds from the disposition of the related real property). Some of the more recent repurchase demands from aggregators we have seen go so far as to acknowledge the bank had entered into a settlement with the GSEs and the loan at issue was part of that settlement, but then state the originator inexplicably is nevertheless liable for the full repurchase price of the loan.

Thus, these big banks essentially maintain that despite their overall extremely favorable global settlements, the originators under their MPSAs with these aggregators are nevertheless liable for the full amount of the “repurchase price.” Let’s identify this practice for what it is: a shameless attempt by the aggregator to make a tidy profit on the repurchase of the loan at issue.

Nothing legally or factually permits aggregators to be “reimbursed” 100 cents for a 10-cent loss. Correspondent lenders should not aid and abet any attempts by aggregators to in effect receive a “bonus” from the correspondent, particularly because the aggregator’s loans and/or loan products during that time were for the most part inherently and fatally flawed. They should keep pressing to see evidence of actual losses. Correspondents that do so may be pleased to find they have exposed an effort by an aggregator to be grossly overpaid for its supposed “losses.”