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Bad Loans Draw Bad Blood (Wall Street Journal)

Summary: Over $2 trillion worth of mortgage backed securities were issued by Wall Street last year. When loans are purchased for securitization, one of the provisos is that lenders must buy back loans that either defaulted early, or had underwriting errors. As housing slows, mortgage buyers are finding more loans that were not up to snuff, and are calling on the originators to buy them back. A recent study by Credit Suisse Group (CS) analyzed 208 bond pools which contained subprime mortgages. Almost half had loan repurchases in 2006, up from less that one third in 2005, although the repurchases represented less than 1% of total mortgage value within the pool. Analysts do not consider this to be a serious problem at this point, but warn that the number of repurchases can increase, even if real estate has a “soft landing.” The effect of increased loan purchases is starting to affect companies that originally underwrote the loans. H&R Block (HRB) recent $131.4 million dollar quarterly loss was largely driven by its adding $102 million to its reserves to cover loans issued by its Option One mortgage subsidiary. And Bear Stearns’ (BSC) mortgage subsidiary is suing MortgageIT (MHL) to force it to buy back $70 million worth of defaulted loans.
Related links: Full articleRecord Number of Foreclosures on the HorizonHow to Play Property RepossessionsHousing Bubble and Real Estate Market Tracker • BusinessWeek: H&R Block Taxes Investor Patience
Potentially impacted stocks and ETFs: Fremont General (FMT), Fannie Mae (FNM), Freddie Mac (FRE), Clayton Holdings (CLAY), IMPAC Mortgage Holdings (IMH)

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Source: Mortgage Buyers Finding More Bad Loans