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Big Banks Increase Reserves in Anticipation of Buyback Demands

Philip R. Stein

Will Big Banks point downstream with even more aggression?

The big banks are gearing up for an aggressive buyback season.

We’ve recently learned that CitiGroup and Wells Fargo have set aside their largest reserves to date to cover new “repurchase” issues. Many expect insistent demands to rain down from Fannie and Freddie, as the mortgage giants face looming statute of limitations cut-offs for such claims.

But what should the big banks’ large piles of cash signal to originators?

To be sure, some money will cover legal fees, but will the big banks direct their lawyers to defend against Fannie and Freddie, or will they turn their lawyers’ focus downstream with even more aggression towards originators?

As we frequently point out to the big banks, before ever seeking “repurchase” from originators, they have an affirmative duty to seek to avoid or mitigate any loss relating to repurchase demands from their own investors. It is our hope that their legal reserves will be spent wisely refuting the GSEs’ claims, rather than just passing such claims through to originators. If the big banks don’t defend against the coming onslaught of demands, it may ultimately be their losses to swallow.

As originators continue to learn their rights and the many strong defenses available against “repurchase” demands, the big banks can no longer simply assume that originators will, in the banks’ view, “fall in line.”

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