Put-backs of defective mortgages are accelerating and the Federal Reserve Board is growing more concerned about the potential risks to the banking system.
"The Federal Reserve has been conducting a detailed evaluation of put-back risk to financial institutions," Fed governor Elizabeth Duke told a congressional panel on Thursday.
She noted in her testimony that put-backs usually involved cases where investors want the originators to buy back defaulted mortgages due to breaches of the representations and warranties.
But new claims that underwriters and sponsors of securitizations failed to comply with federal securities laws are cropping up.
"Most of the lawsuits are in the early stages," Duke testified, "and it is difficult to ascertain the probably that investors will be able to shift a substantial portion of the losses" to the sponsors of the MBS.
She also noted that financial institutions are "vigorously" defending against these claims.
"We are gathering information to ensure that institutions we supervise have adequately assessed these risks and have accounted for them properly," Duke said.
