Bad bank loans to Fannie and Freddie not being bought back

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Selling bank loans as securities is not like selling used cars; if securities are defective, the seller must buy them back. Image from Wikimedia commons.

Part of what caused the collapse of the housing market was toxic mortgages. A loan lender or bank would lend a mortgage to a customer and sell the debt as an asset. Sometimes the mortgage went bad because of circumstances, and some were lent to people who shouldn’t have been lent bank loans in the first place. Many of these loans were sold to Fannie Mae and Freddie Mac, and when the assets went bad, Fannie and Freddie went into freefall. Few of these bad loans are being bought back by the banks that sold them.

Bad loans can be repurchased

It seems fair that if bad mortgages were sold on the market and seriously damaging the companies that bought the bad finance loans, those loans should be bought back. In fact, laws were passed that guaranteed loans had to be bought back by the seller if the loans in question went bad. Freddie Mac and Fannie Mae bought a lot of these mortgages. Because both of those companies are seriously in trouble, and the law is on their side, those toxic assets should be getting repurchased.

No redress of defective assets

However, the toxic assets are not being repurchased. In fact, according to USA Today, more than $11 billion in defective loans were returned by Fannie and Freddie to the institutions that sold them, only for the bank or loan company to refuse to purchase them. Of those defective loans, a third have been waiting to be addressed for at least 90 days. The backing for mortgage loans also was provided for by the Federal Housing Administration and the Veterans Administration.

Banks hurting themselves

A bank or loan company that refuses to buy back these loans is only hurting itself. Fannie and Freddie are being propped up with taxpayer dollars, and businesses as well as individuals pay taxes. That means that the longer the mess drags on, the more everyone has to pay, including bank executives and shareholders.

Sources

USA Today

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