Several major banks and brokerage firms are demanding that subprime mortgage originators buy back high-risk loans they sold to the banks in 2005 and 2006 as the default rate climbs. In December, Merrill Lynch ordered ResMae Mortgage Corp., which had sold it $3.5 billion in subprime mortgage loans in 2006, to buy back $308 million of those loans. ResMae was unable to cope with the "severe and unexpected" demand and filed for bankruptcy this week. Yesterday, subprime lender Accredited Home Lenders posted a $37.8 million Q4 loss, partly on repurchases of bad loans. Many large banks now face a double problem: not only are they lumbered with bad loans accumulated during a buying spree over the past two years, but money they lent the mortgage originators is less and less likely to be paid back. The housing slump has been marked by dropping home values, rising interest rates and surging default rates. The banks and brokerages are now hiring consultants like Clayton Holdings to help them comb through their subprime portfolios for loans that should be bought back. HSBC has sued several small lenders in federal court for refusing to buy back delinquent loans. Analysts expect repurchases to continue for another six months or so.

Sources: Wall Street Journal
Commentary: Delinquencies in Sub-prime Mortgages Hit HSBC, Shares Trade Lower • Rise in Sub-Prime Defaults Leave Investors Asking Who's Next • Foreclosure Threat Ominous for Subprime Borrowers
Stocks/ETFs to watch: Merrill Lynch & Co., Inc. (MER), HSBC Holdings plc [ADR] (HBC), JPMorgan Chase & Co. (JPM), Accredited Home Lenders Holding Co. (LEND), New Century Financial (NEW), Clayton Holdings, Inc. (CLAY). ETFs: iShares Dow Jones US Broker-Dealers (IAI), Vanguard Financials ETF (VFH), WisdomTree High-Yielding Equity (DHS)

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