U.S. Banks May Face Less Pressure for Mortgage Refunds, Oppenheimer Says

Bank of America Corp., JPMorgan Chase & Co. and four more of the largest U.S. home lenders face $7.4 billion of losses over the next year tied to mortgage repurchases, less than some analysts have predicted, according to Oppenheimer & Co.

Costs may be curtailed because mortgages are going bad at a slower rate, Oppenheimer analyst Chris Kotowski wrote in a report today. Fewer defaults will reduce the flow of new demands for refunds from mortgage-buyers such as Fannie Mae and Freddie Mac to banks that made the loans, he wrote.

“We don’t expect this problem to spiral out of control,” said Kaimon Chung, an Oppenheimer analyst who works with Kotowski. “The repurchase requests have been tracking what we estimated in February.”

Investors are focusing on mortgage repurchases as lawmakers and regulators prepare for debates on how to salvage Fannie Mae and Freddie Mac, which were saved from collapse by government bailouts. Pressure is growing on Fannie and Freddie to return bad loans to their originators, with analysts estimating that banks could be forced to absorb losses approaching $200 billion.

Compass Point Research and Trading LLC predicted earlier this month that 11 large U.S. lenders could incur losses ranging from $55.3 billion to $179.2 billion over the next three years. Fitch Ratings on Aug. 18 said claims from Fannie and Freddie may cost the four largest U.S. banks $17 billion.

Estimates Differ

The scope of the studies differed over which banks they included, the time spans examined and the source of claims, which can also include insurers and private investors.

They also differed on how much banks can recover from delinquent borrowers if the loans wind up back with the lenders. Kotowski assumed a 35 percent “severity” or loss rate.

“While there is a large pool of delinquent loans to be worked through, one can for the first time see the light at the end of the tunnel in terms of the size of the pool,” Kotowski wrote in the report. “It is important to recognize that while the problem is massive, it is becoming more finite and bounded.”

Oppenheimer focused on Bank of America, JPMorgan, Citigroup Inc., Wells Fargo & Co., SunTrust Banks Inc. and PNC Financial Services Group Inc. The six lenders will receive $27 billion in repurchase claims over the next year from mortgage buyers and insurers who say banks sold housing debt to investors based on false or misleading data, Kotowski estimated.

Bank Tally

Bank of America, the largest U.S. lender by assets, may report $3.2 billion in losses over the next year from repurchase requests, Oppenheimer said. JPMorgan, the second-largest U.S. bank, and No. 3 Wells Fargo, each may lose $1.6 billion, he said. Citigroup’s loss could be $690 million. Bank of America is based in Charlotte, North Carolina, and JPMorgan and Citigroup are based in New York. San Francisco-based Wells Fargo was 2009’s biggest home lender.

Tom Kelly of JPMorgan, Rick Simon of Bank of America and Mary Eshet of Wells Fargo had no immediate comment. Jon Diat of Citigroup didn’t immediately return a telephone call.

Banks typically keep reserves to cover buyback losses. Bank of America earmarked $3.9 billion as of June 30, JPMorgan had $2.3 billion and Wells Fargo had $1.4 billion, according to regulatory filings.

Loan Guarantees

Banks make home loans and then typically sell them to Fannie Mae and Freddie Mac, with a promise to buy them back if it’s later discovered that the mortgages were made improperly. Defects can include missing or inaccurate documents about the property and its value, or bad data about the borrowers.

Known as “representations and warranties,” the promises can be enforced over the life of the loan. Most demands for repurchase come within the first few years, according to Bank of America.

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.

While mortgage insurers are filing more lawsuits related to soured loans, “we view this as a protracted legal battle in which some middle ground will ultimately be found and in which the lawyers will be the only winners,” Kotowski said.

To contact the reporters on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

• Tweet
• More
  • Business Exchange
  • Buzz up!
  • Digg
• Print
• Email