Government-owned Fannie Mae and Freddie Mac are stepping up efforts to find bad home loans that they can force mortgage lenders to buy back from them, providing an increasingly bigger headache to banks.

The government-controlled companies are squabbling with banks over who should bear the burden of losses from the housing crunch, in particular loans made between 2005 and 2008, when the market was at its frothiest.

Fannie Mae and Freddie Mac's efforts will translate to higher mortgage losses for banks in the coming quarters. But the end of the fighting may be in sight. Fannie Mae, the larger of the two finance companies, is more than halfway through its review of loans to try to sell back to banks and is mainly focusing on that four-year period, a source familiar with the matter said.

Fannie Mae and Freddie Mac buy mortgages from banks and bundle the loans into bonds that get sold to investors. The loans are supposed to have met guidelines to be eligible for bundling. The two mortgage giants guarantee the packaged bonds.

Historically, Fannie Mae and Freddie Mac have taken banks at their word when they said loans were eligible. If later there were problems (because the borrower's income was not properly verified, for example), then Fannie Mae and Freddie Mac could ask banks to buy back the mortgages at face value and absorb any losses.

Those repurchase requests are increasing as Fannie and Freddie apply more scrutiny. Both companies have hired more staff to comb through loans and determine which can be sold back to banks.

In the second quarter, outstanding repurchase requests at Fannie Mae grew by 20 percent to $14.6 billion from the first quarter, according to a filing last week.

Banks can argue about whether they really did follow guidelines, but the impact of buyback requests on lenders is clear. Bank of America Corp, Wells Fargo & Co, PNC Financial Services Group Inc and others set aside more money in the second quarter to cover repurchase requests.

Fannie Mae and Freddie Mac say they are trying to recover as much money as possible for taxpayers after receiving more than $188 billion of government support during the housing crunch. They have since repaid about $45 billion.

Banks believe Fannie and Freddie are nailing them on technicalities. If the two companies bear down too hard on lenders, banks could originate fewer mortgages, further pressuring the housing market.

That may already be happening. Bank of America has reduced its mortgage lending and is no longer selling most loans to Fannie Mae. And Fannie Mae and Freddie Mac's regulator is concerned enough that it is thinking of changing the repurchase process to press the companies to look at loans before agreeing to guarantee or purchase them.

A suffering housing market hurts Fannie Mae and Freddie Mac as well.

"It's an interesting legal dance and business relationship dance that Fannie and Freddie are playing," said Joseph Buonanno, a lawyer at Hunton & Williams who specializes in mortgage and capital markets issues.

In addition to repurchase requests from Fannie and Freddie, the banks also face possible losses from loans sold to private investors and those that were insured by bond insurers, who say they shouldn't be on the hook for inappropriately underwritten loans.

Generally, banks' disputes with Fannie Mae and Freddie Mac have to be worked out loan by loan. The government-owned companies' efforts to craft broad settlements with banks, most notably Freddie Mac's deal with Bank of America announced in January 2011, have come under criticism.

The inspector general at the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, said there were questions about how Freddie came up with its settlement figure, which may have cost taxpayers billions of dollars.

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Editor's Note: First Progressives establish groups like ACORN to pressure banks and elected officials to provide inappropriate loans to people who have no business getting them. Then Progressives and Democrats charge financial institution -- through legislation -- to afford these loans under the threat of being branded discriminatory. Then Fannie and Freddie try to parlay this stupidity into greed, so much so that it crashes the system. And now they want to "reverse the Mississippi"?...This is why government should never be involved in "social justice." And this is why social justice community organizers and social justice special interest groups should be exposed for who and what they really are...redistributionist Marxists.


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