Economy Watch: Do Mortgage Put-Backs Mean Huge Losses for Banks?

At a hearing of the Congressional Oversight Panel, President Barack Obama and administration officials said no.

October 28, 2010
By Dees Stribling, Contributing Editor

Courtesy Flickr Creative Commons user pnwra

Does the prospect of mortgage put-backs pose “systemic risk” to the banking system? At a hearing of the Congressional Oversight Panel, President Barack Obama and administration officials said no. The appropriately named COP was created two years ago to keep track of the Troubled Asset Relief Program, but clearly has found other things to do since then.

“At this point, there is no evidence of a systemic risk,” Phyllis Caldwell, Treasury’s chief of homeownership preservation, asserted. “[We are] working very closely with 11 regulatory and federal agencies. We are watching this every day.”

As yet, there are no definitive estimates of how much it would cost the banking industry if individual banks were suddenly obliged to buy back carelessly securitized mortgage loans from unhappy investors, though a number of multi-billion dollar figures have been bandied around. Various groups of unhappy investors are already mobilizing for litigation to force banks to buy back their mortgages, but considering the way such cases tend to grind along, there probably will be no “suddenly” about it.

Wells Fargo to Re-Fill Some Mortgage Documents

Wells Fargo said on Wednesday that just maybe a few of the foreclosures it has initiated recently weren’t quite up to snuff, at least in terms of documentation. Some 55,000 such cases, in fact, which is the number of foreclosures that the banking giant says it plans to re-file next month, after weeks of claiming that its handling of foreclosures was A-OK.

Actually, the bank is still more-or-less claiming that. “Out of an abundance of caution and to provide an additional level of assurance regarding its processes, the company is electing to submit supplemental affidavits for approximately 55,000 foreclosures which are pending before courts in 23 judicial foreclosure states,” it noted in a statement.

Wells Fargo is not, however, planning to suspend foreclosure activity, even for a short period, unlike Bank of America and GMAC. The bank was quick to point out in the same statement on Wednesday that borrowers who were foreclosure upon in September were on average 16 months’ delinquent on their payments.

New Homes Sales See Uptick

According to the U.S. Census Bureau and HUD, new home sales were at an annualized rate of 307,000 in September, an increase of 6.6 percent compared with the revised August rate of 288,000. That was a little more than economists expected, but the margin of error (a whopping ± 16.9 percent) means that the uptick could be revised away next month.

The median sales price of new homes sold in September was $223,800, and the average price $257,500. In September there was an eight-month inventory of new houses, down from 8.8 months in August.

Wall Street lost some ground on Wednesday, but not much, and not tech stocks. The Dow Jones Industrial Average lost 43.18 points, or 0.39 percent, while the S&P 500 declined 0.27 percent. The Nasdaq saw an uptick of 0.24 percent.