Ok the inevitable is finally happening. Companies like Countrywide that originated and packaged horrible mortgages as investment grade securities are now getting a fresh wave of big indigestion. The managers and institutions who bought the junk (including the NY Federal Reserve and Freddie Mac) are now filing to 'punt the junk' back to them. The issuing docs all provided for this “put-back demand” if it was ever found that the originators breached representations and duties in originating the mortgages. Read the whole legalize letter that was sent yesterday to Countrywide and company from the claimants here.
“…the presence of two names on the list of complaining bond buyers was truly terrifying: the New York Fed and Freddie Mac.
Top Wall Street executives had assumed that the government agencies would not be on the other end of put-back demands, according to my sources. They believed that their put-back exposure would be limited to private market buyers of mortgage-backed securities. The far larger portfolios of securities owned or insured by the Fed or government-sponsored entities were assumed to be safe from put-back demands.
“The universe just got a whole lot bigger,” one executive said.
What he means is that the “universe” of potential liability is greatly expanded, if the Fed and the GSEs start demanding that banks repurchase the mortgages they included in residential home-loan securitizations.
“We thought the government wouldn't come after us on these things. It bought them to stabilize the financial sector and the housing market. Going after us would undo both those things,” one executive explained.
But with Freddie and the New York Fed, through its Maiden Lane operations, on the other end of the Bank of America put-back letter, the assumptions are changing. The losses from residential mortgage-backed securities (RMBS) repurchase obligations could grow to staggering levels…”
See: Why the Bank of America put-back demand has Wall Street freaking out.
The rats will now all fight each other to the death. Interesting to see how they settle this one.