Fitch Ratings said Wednesday the four largest U.S. banks could book losses of up to $42 billion if Fannie Mae and Freddie Mac force them to take back troubled mortgages they originated.
Fitch estimates that JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. could record $17 billion in losses if they repurchase a quarter of the mortgage giants' seriously delinquent loans.
In the worst case, they could lose $42 billion if the government-sponsored entities force them to buy back half of their bad loans.
Investors that buy loans from banks have the right to force lenders to repurchase them if there were lies on the loan applications. Recently, Fannie and Freddie have actively done this for $354.5 billion worth of bad mortgages. As a result, these banks have started to beef up their cash reserves recently to absorb the losses.
Fitch's estimates only include Fannie's and Freddie's troubled loans and don't account for private investors or mortgage insurers, which also could force loan buybacks.
The ratings agency is closely watching investor lawsuits against lenders to determine if more buybacks are in the offing. If so, the banks' issuer default ratings could be downgraded, Fitch said, and there could be repercussions for rating the banking industry as a whole.
Fannie and Freddie Mac own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. They buy home loans from lenders, package them into bonds with a guarantee against default and sell them to investors. Or, they keep the loans on their books.
The two companies have withdrawn almost $150 billion in government aid since they nearly went under in September 2008.
Shares of JPMorgan Chase rose 41 cents to $37.89. Citigroup's stock added 1 cent to $3.86, while Bank of America's shares edged up 11 cents to 13.32. Wells Fargo's stock increased 4 cents to $25.38.
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