Wells
Fargo & Company (NYSE:WFC), the fourth largest bank in the United States,
said on Tuesday it could lose about $2.6 billion due to demand for repurchase
of more bad mortgage loans from Fannie Mae and Freddie Mac.
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The
repurchase requests pertain to loans made between the period from 2006 and 2008
when the country was going through a housing bubble, that led to inflated
housing prices. When the bubble burst, house owners found themselves holding
real estate that could not fetch them the investments they had made in it.
The
company has already set aside reserves to cater to these requests. At the end
of the June quarter reserves to cover these repurchase requests stood at $1.8
billion, compared to $1.4 billion at the end of the March quarter.
The
estimate of possible losses on top of those reserves is "reasonably
possible" but does not represent a "probable loss," the bank
said in its quarterly filing.
The
news sent the shares of Wells Fargo sliding 12 percent to $33.96 at the end of
trading on Tuesday.
State-owned
mortgagers Federal National Mortgage Association(OTC:FNMA) and Freddie Mac were
at the receiving end of the housing bubble which burst in 2008 following the
sub-prime lending crises when it was found that the mortgagers had taken on
loan portfolios with a high percentage of risky borrowers.
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Analysis
These
two entities now wants banks, from whom it had bought mortgages earlier, to buy
them back as it tries to reduce losses for taxpayers.
Bank
of America Corp(NYSE:BAC), the country’s second largest bank, is facing the
prospect of buying back loans worth $15.9 billion from plus an additional $5
billion.
The future of Fannie Mae rests on the shoulders of the public. Has the perception of the housing market finally shifted to a more positive one? If the answer is yes, then there is a chance that Fannie Mae will more profit moving forward. However, if the answer no I think that Fannie Mae will eventually and unfortunately dissolve.
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