The Federal Reserve Bank of New York on Wednesday said it may try to force banks to repurchase bad home loans backing securities it holds, joining the ranks of other big investors who have been gaining momentum with identical demands.
The effort from the New York Fed to boost the value of its Maiden Lane portfolio is similar to what U.S. mortgage finance giants Fannie Mae and Freddie Mac have been doing as they try to hold accountable sources of irresponsible lending that caused steep losses.
The investors are seeking to enforce representations and warranties that ensure the quality of loans put in bonds, such as residential mortgage-backed securities and collateralized debt obligations sold by Wall Street during the housing boom.
"Through our ongoing management of the Maiden Lane portfolios we are involved in multiple efforts related to exercising our rights as investors in non-agency RMBS or CDO securities including those that require originators to repurchase ineligible loans," Jack Gutt, a New York Fed spokesman, said in an e-mail.
The three Maiden Lane funds combined held an average $67.4 billion in assets in the week ending July 28, Fed data shows.
The Fed's acknowledgment comes after Reuters last month reported that investors representing $500 billion in bonds — or a third of the private mortgage bond market — said they have taken the biggest steps yet in their effort to force banks to repurchase loans sold in error.
These investors have topped the key 25 percent threshold for voting rights on 2,300 "private-label" mortgage bonds, which will give them the ability to force trustees to act on repurchase requests. Investors heretofore have been frustrated by trustees and servicers, who have said they are limited in the information they can share.
"Investors have been getting organized, and soon there will be a very large effort to resolve this mortgage problem," said Bill Frey, president of Greenwich Financial, who has been working for bond investor rights for the past three years.
The New York Fed's intentions on repurchases were first reported by Bloomberg News.
Enforcement of representations and warranties is making a significant mark on banks, which have responded by boosting reserves and possibly pulling back on credit for homebuyers.
The potential liability of the contracts has also been cited as an issue complicating Ally Financial's sale of Residential Capital, a major U.S. lender.
Fannie Mae and Freddie Mac, the largest providers of U.S. mortgage funding that own or guarantee more than half the entire market, have been aggressive with repurchase demands of lenders. In the first quarter, Freddie Mac forced lenders to buy back $1.3 billion in the first quarter, and had nearly $5 billion in outstanding demands.
Investors who have banded together represent more than $500 billion in securities managed for pension funds, 401(k) plans, endowments, and governments, according to a letter to trustees from Dallas-based attorney Talcott Franklin. The securities are private mortgage bonds issued by Wall Street firms that helped trigger the worst financial crisis since the 1930s.
The New York Fed spokesman declined to comment when asked if the bank is participating in the broader investor effort, in which bond managers aggregated holdings in a clearing house developed by Franklin .
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