Competition and Crisis in Mortgage Securitization

76 bank of americas 2010 annual report reveals that

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76. Bank of America’s 2010 annual report reveals that the GSEs have brought more claims, both in absolute terms and as a percentage of loans purchased, than private securitization investors, and the GSEs have been more successful in resolving those claims. See B ANK OF A M . C ORP ., supra note 75, at 57–59. On $1.1 trillion in loan sales to the GSEs from 2004 to 2008, the GSEs brought $21.6 billion in claims, or approximately 2%. Of these claims, $18.2 billion, or over 80%, have been resolved, with Bank of America claiming net losses of 27%. On 963 billion in loan sales to private securitizations, investors and private mortgage insurers brought $13.7 billion in claims, or less than 1.5%. Of these claims, $6 billion, or less than half, have been resolved. Recent news reports suggest that Bank of America may be settling more claims with private investors. See Dan Fitzpatrick, BofA Nears Huge Settlement , WSJ. COM (June 29, 2011), . 77. FCIC R EPORT , supra note 74, at 224 (“[D]uring the three years and eight months ending August 31, 2010, Freddie and Fannie required sellers to repurchase 167,000 loans totaling $34.8 billion. So far, Freddie has received $9.1 billion from sellers, and Fannie has received $11.8 billion—a total of $20.9 billion. The amount put back is notable in that it represents 21% of $163 billion in credit-related expenses recorded by the GSEs since the beginning of 2008 through September 2010.”) The GSEs’ actual recovery of $20.9 billion is 13% of $163 billion. 78. See, e.g. , Ryan Bubb & Alex Kaufman, Securitization and Moral Hazard: Evidence from
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234 INDIANA LAW JOURNAL [Vol. 88:213 Enforcing repurchase agreements requires sampling loans to identify those that are defective. In the mid-2000s, private securitizers in need of loans from originators reduced their loan sampling rates 79 and waived in many noncompliant loans. 80 Originators also often “gamed” securitizers’ quality control systems, resubmitting previously rejected loans in new pools. 81 Resubmissions would presumably be less likely to succeed if the securitization market was highly concentrated and a single securitizer was reviewing the same loan a second time. The GSEs’ most powerful tool for exercising control over originators may have been their centralized purchasing power. The GSEs can discipline originators by ending their relationship if the originator fails to comply with GSE underwriting standards or if there is an unusual increase in defaults of the originator’s loans. 82 A decision by the GSEs to cut off funding for an originator by refusing to purchase that originator’s loans could have a devastating and almost immediate impact on the originator’s revenues and potential profits. The GSEs have in fact cut off a number of originators over the years, usually putting those originators out of business.
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