PhillyDeals: Asking banks to make good on bad loans

After losing $200 billion and going on taxpayer life-support, crippled home-loan-finance giants Fannie Mae and Freddie Mac are demanding the nation's biggest banks buy back some of the bad loans that dragged the pair under.

For example, Freddie demanded banks repay $4 billion last year, about one-fifth of its 2009 losses, for loans that were "sold to us in breach of representations and warranties," the Virginia-based company said in its annual financial report last month.

For Freddie and Fannie to buy loans and keep the home market popping in the mid- 2000s, rules required that "the homes needed to be owner-occupied, and the buyers had to meet certain [credit] scores, and the loan-to-value ratio" had to be above certain minimums, Freddie chief executive officer Charles "Ed" Haldeman said in a visit to the University of Pennsylvania last week.

But a lot of loans didn't meet the conditions, auditors have found, and they're demanding the nation's biggest banks make good - JPMorgan Chase & Co., Bank of America Corp., and Citigroup Inc., among others.

I asked Haldeman if he's going after the individuals who, as lenders and bosses, stuck the companies - and the taxpayers - with those billions in losses, as well as the Freddie employees who maybe should have noticed all those bad loans.

He wouldn't comment on "matters that might or might not" be associated with "potential litigation."

"We continue to have a very important ongoing relationship" with the banks, Haldeman also told me. "They are our customers. We need each other."

Of course, so do problem drinkers and State Stores.

Meanwhile, in the office and warehouse market:

"You'll hear a lot of people talk about a looming crash. The crash has already occurred," said E. Todd Briddell, president of Bank of New York Mellon Corp.'s $3 billion asset Urdang, the commercial real estate arm in Plymouth Meeting.

"It's now an accounting problem."

Commercial construction has stopped. But the market for buildings "is starting to creep back up," says Richard Ferst, Urdang's newly promoted chief executive.

If demand is still dead, why are investors like Urdang starting to buy stuff again?

In the mid-2000s building bubble, banks used to require borrowers to pay just, say, 15 percent down on a $100 million building. By now, values have fallen, say, 40 percent. And banks now require 40 percent down.

Do the math, and "it should be obvious that the risk of refinancing that old $85 million loan, for just $36 million, is quite low," Briddell told me. Compared with the original loan, at least.

"But someone has to accept the difference, the $49 million loss," Ferst added. Should it be the bondholder, or the owner, or the bank? "It comes down to an accounting issue," Ferst said.

The Congressional Oversight Committee, a politically mixed group, warned last month that $1.4 trillion of commercial mortgages on office, warehouse, and apartment buildings will expire in the next four years; prices are, after all, down 40 percent; borrowers and owners cannot pay, and banks are going to have to eat a lot of the losses.

This will take some time.

"The government is acting very differently from in the last recession," Briddell told me. In the savings-and-loan crisis of the early 1990s, "there was mass failure of banks, and the Resolution Trust Corp. disposed of them quickly."

But this time, Ferst contends, government agencies "have taken a much more patient approach: Keep interest rates low. Allow them to play games with mark-to-market [loss] accounting.

"More banks are failing, but the pace is measured," a few each week. The problem is being extended, so it won't seem so severe.

As a result, "We don't see the market recovering quickly," Ferst said.

But Urdang stopped investing before the crash, and now it has several hundred million dollars it's using to bargain-hunt - an office complex in Bethesda, Md., the builder has repossessed, a foreclosed housing development in Las Vegas, and condominiums in Boca Raton, Fla.