As of June 30 of this year, Wells Fargo & Co., this nation’s largest mortgage lender, had received demands to repurchase $1.4 Billion out of the $343 billion of residential-mortgage loans Wells Fargo sold to Freddie Mac and Fannie Mae between 2005 and 2008. Freddie Mac claimed that Wells Fargo breached certain representations and warranties made to Freddie Mac relating to thousands of loans purchased from Wells Fargo. Last week, Wells Fargo announced that it will make a one-time cash payment to Freddie Mac in the amount of $780 Million which, combined with payments already made, amounts to a total settlement amount of $869 Million and “resolves substantially all repurchase liabilities related to loans sold to Freddie Mac before 2009.” Millions of dollars in repurchase demands made by Fannie Mae to Wells Fargo remain pending.
Wells Fargo follows similar settlements by Citigroup and BofA
Wells Fargo’s massive settlement announcement comes on the heels of a similar settlement between Freddie Mac and Citigroup, Inc.—the third-largest bank in the nation—which paid $395 Million to resolve its mortgage-repurchase liability to Freddie Mac for loans sold between 2000 and 2012 . Citigroup also settled repurchase demands made by Fannie Mae only months earlier, to the tune of $968 Million, following Bank of America’s massive settlement payment of $3.6 Billion to Fannie Mae earlier this year.
Wells Fargo anticipated this landslide of mortgage-buyback claims, and clearly expects more to come, as “the bank had $2.2 billion in reserves for buying back faulty mortgages at the end of the second quarter and has added $6.5 billion to its reserves since 2009.”
Loan originators should continue to be cautious
Mortgage loan originators can reasonably expect an uptick in “repurchase” demands from Wells Fargo for loans sold to Freddie. Moreover, based on the conduct of other “too big to fail banks”, we would not be surprised if, despite its settlement, Wells Fargo continues to demand that originators pay the full amount of its purported repurchase “losses” in respect of those loans. We believe, however, that the settlement amount becomes the new ceiling in any settlement discussion on a loan that Wells Fargo had sold to Freddie, and it is absolutely relevant for the originator to inquire as to the amount of Wells Fargo’s actual losses (ie., the allocated settlement payment) related to the loans in question. Relatedly, in our experience, in its demands made on originators, Wells Fargo does not name the investor that it claims in turn had made a demand on it. This settlement is yet another reason for originators to insist on objective external documentary support for the investor’s name and the amount and timing of the investors’ purported demands (as well as insisting on documentary support for all other aspects of any repurchase demand).