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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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.