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Fannie and Freddie trying to return bad mortgages

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Kai Ryssdal:Treasury Secretary Timothy Geithner spent most of yesterday stuck in a big conference in Washington, trying to figure out what to do with Fannie Mae and Freddie Mac. The mortgage companies are into the government to the tune of a $150-billion bailout. So they, in turn, are trying to find how to deal with the countless bad mortgages they hold on their books. One thing they’re trying is what’re called buy-backs, forcing the banks that originally made the loans that went bad to buy ’em back.

Marketplace’s Alisa Roth reports.

Alisa Roth: It’s like when you buy, say, a new TV and it doesn’t work properly. You take it back to the store and ask for your money back.

With buy-backs, Fannie Mae and Freddie Mac have doing essentially the same thing, but with mortgages that gone have gone bad. They’re taking them to the loan originators and demanding their money back.

Greg McBride is a financial analyst at He says Freddie and Fannie are in a lot of trouble.

Greg McBride: There’s a lot of pressure for them to right the ship and become less of a burden on the taxpayers. And part of that means that they’re in the process of kicking back any defective merchandise that they own.

A lot of the originators are big names, places like Wells Fargo and Bank of America. But there are plenty of smaller institutions, too. They have been paying up: In the first half of the year, Freddie Mac reportedly managed to recoup about $2.7 billion. But it was still waiting on another $5.6 billion.

Last week, Freddie Mac said it would start punishing banks that don’t pay up. David Lykken works for Mortgage Banking Solutions. It’s a consulting firm for the mortgage industry. He says Fannie and Freddie have been playing the tough guy all along.

Lykken: We’re finding that Fannie Mae and Freddie Mac are very inflexible and they’re saying, “Sorry, that doesn’t work.”

Lykken says he expects the fights to continue for awhile.

Lykken: Unfortunately, there is an ample supply of loans going bad. So we’re anticipating this to become even more of an issue over the next couple of years.

Though probably not indefinitely. New lending requirements are so tight that it should be hard for bad borrowers to get through.

In New York, I’m Alisa Roth for Marketplace.

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