Banks May Face $134 Billion Loss on Loan Refunds, Compass Says
Bank of America Corp. and JPMorgan Chase & Co. are among 11 lenders that could suffer $133.8 billion in combined losses as mortgage-bond investors and insurers demand refunds for soured loans, according to an analysis by Compass Point Research and Trading LLC.
That’s the base estimate by analyst Chris Gamaitoni, who told clients costs may range from $55.3 billion in a best-case scenario to $179.2 billion at worst. The losses would be in addition to $28 billion of buyback demands by Fannie Mae and Freddie Mac that Compass previously predicted. Deutsche Bank AG and Goldman Sachs Group Inc. are among lenders confronting the biggest potential impact, according to Gamaitoni’s report.
Lenders have been barraged by claims from mortgage buyers and insurers who say banks sold housing debt to investors based on untrue or misleading data about home loans. The estimated losses exceed 10 percent of tangible book value at eight of the banks Gamaitoni cited. While solvency isn’t at risk, the drain on profit could last for years, he said.
“The investor community overall doesn’t understand the magnitude of the problem,” Gamaitoni said in a telephone interview. Gamaitoni was a senior financial analyst at Fannie Mae before joining Compass Point, a Washington-based research and investment banking firm founded in 2007 by former executives of Friedman Billings Ramsey & Co.
Legal Claims
Bond insurers including MBIA Inc. and investors including three of the government-chartered Federal Home Loan Banks have sued securities underwriters and issuers, citing inaccurate claims over property values and quality of underlying assets. Fannie Mae and Freddie Mac collapsed into U.S. conservatorship, while MBIA saw its stock price slide more than 80 percent as losses mounted.
Bank of America, the biggest U.S. lender by assets, doesn’t comment on research reports, said Jerry Dubrowski, a spokesman for the Charlotte, North Carolina-based company. Spokesmen Michael DuVally at Goldman Sachs and JPMorgan’s Thomas Kelly declined to comment; both firms are based in New York. John Gallagher of Frankfurt-based Deutsche Bank wasn’t immediately available to comment.
Compass Point focused on the risks to underwriters of home- loan securities during the peak years of the housing boom, which included 2005 through 2007. The conclusions were based on estimates of the amount of bonds underwritten by banks backed by so-called subprime and Alt-A mortgages, which typically had the worst repayment records, plus the average default rates on the loans and a base estimate that 80 percent of defaulted loans were invalid.
Book Value
Bank of America, which acquired Countrywide Financial Corp. in 2008, faces a $35.2 billion loss under Compass Point’s base- case scenario, or 17 percent of tangible book value. JPMorgan Chase, which acquired Bear Stearns Cos. and Washington Mutual Inc., may lose $23.9 billion, or 13 percent of book value, while Deutsche Bank may lose $14.1 billion, or 21 percent of book value, according to the report. Goldman Sachs may face an $11.2 billion hit equal to 11 percent of book value, the report said.
“It’s not going to cause any solvency issues because the banks have other earnings, and it’s going to happen over time,” Gamaitoni said, estimating most of the losses will be recorded over the next three years. “It’s going to be more like a slow bleed.”
The banks, which underwrote securities made up of mortgage loans, face years of legal disputes because they are “the ones left standing” after the failure of hundreds of subprime lenders who dealt directly with home buyers, Gamaitoni said.
Ratings Impact
Fitch Ratings, in a separate report today, said the four biggest U.S. banks may have combined losses of $17 billion to $42 billion due to repurchase requests from Fannie Mae and Freddie Mac. More aggressive demands from the two companies subject Bank of America, JPMorgan, Citigroup Inc. and Wells Fargo & Co. to “losses that have not been previously incorporated into Fitch’s existing exposures and effectively into current ratings,” according to the report.
Underwriters typically didn’t make many contractual promises about the quality of loans in mortgage bonds, and so may be less legally liable than the companies that issued the debt or securities, according to Jonathan C. Wishnia, a lawyer at Lowenstein Sandler PC in Roseland, New Jersey, who has represented financial companies including loan servicers and investment firms.
“It seems uphill to me to go after the underwriters,” said Jason H. P. Kravitt, a lawyer in New York at Mayer Brown LLP who represents clients including banks and asset-backed issuers and serves as deputy chair of the American Securitization Forum trade group.
To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net.
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