The Federal Reserve Bank of New York may require seller/servicers of nonprime mortgages and CDO sponsors to repurchase certain loans out of mortgage trusts that are controlled by the agency.
A spokesman for the New York Fed confirmed to National Mortgage News that forcing buybacks on originators (and firms that created CDOs) is one option to recovering losses on these assets, but declined to comment further.
The Fed issued a statement saying: "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. These efforts support our primary goal of maximizing the value of these portfolios on behalf of the American taxpayer."
In 2008 the New York Fed created three limited liability corporations — Maiden Lane I, II, and III — to manage upwards of $162 billion (notional value) of prime and nonprime mortgage assets, commercial holdings, and other investments that belonged to Bear Stearns and American International Group. (During the financial crisis Bear was taken over by the Fed and liquidated while AIG became a ward of the government.)
It's unclear how successful the Fed might be regarding buybacks. Bear Stearns, for instance, in issuing nonprime ABS during the boom years relied on product from dozens of nonbank subprime funders, most of which are now bankrupt or out of business. Bear even lent these nonbanks money in the form of warehouse lines or 'repo' agreements. The New York Fed might have better luck going after firms that created CDOs.
The Fed's statement on buybacks centers around nonprime assets. On its Web site, the agency provides a breakdown of the assets in all three LLCs.
Christopher Whalen of Institutional Risk Analytics said in a note to his clients that the Fed forcing buybacks on companies could be "just the tip of the iceberg on loan repurchases."
For the past two yeas Fannie Mae and Freddie Mac have been forcing buybacks on seller/servicers of non- and underperforming loans. This year, GSE buybacks could total $21 billion.