Mortgage Buybacks May Cost Banks $22 Billion, Barclays Says

Bank of America Corp. and JPMorgan Chase & Co. lead U.S. banks in facing an estimated $22 billion in costs tied to refunds for faulty mortgages, according to analysts at Barclays Capital.

The costs dealing with repurchase requests may be $4.9 billion at Charlotte, North Carolina-based Bank of America and $2.9 billion at JPMorgan, analysts Jonathan Glionna and Miguel Crivelli wrote in a report today. Wells Fargo & Co., the biggest U.S. home lender last year, faces costs of $2.6 billion, while Citigroup Inc. may pay $1.1 billion.

Lenders are dealing with more frequent claims from mortgage buyers such as Fannie Mae and Freddie Mac, which were saved from collapse by taxpayer bailouts. The government-sponsored entities are among investors looking to recoup losses from home loans made with false information or misleading representations.

The costs are “manageable” for the banks because of reserves and tangible common equity they hold, Glionna and Crivelli wrote. Lenders hold $8.3 billion of reserves and have $460 billion of tangible common equity, the report said.

“Even in a worst-case scenario, it is hard to envision repurchase requests exceeding the substantial resources now available to the industry,” the analysts said.

The estimates are based on $2.9 trillion of mortgage-backed securities outstanding from 2006 through 2008. Of that total, $1.6 trillion is guaranteed by Fannie Mae or Freddie Mac.

Oppenheimer Estimates

Barclays’s estimates assume a 15 percent default rate, 25 percent mortgage-repurchase-request rate, and 50 percent repurchase-acceptance rate on the agency-backed portion of the loans. Those assumptions would result in $14 billion of costs to banks, the report said.

The non-agency portion assumes a 20 percent default rate and 10 percent repurchase-request rate, leading to $8 billion of costs.

Oppenheimer & Co. analyst Chris Kotowski said in a report last month that costs may be curtailed because mortgages are going bad at a slower rate. He estimated $7.4 billion of losses over the next year for six of the biggest U.S. banks, including Bank of America and New York-based Citigroup and JPMorgan.

Compass Point Research and Trading LLC predicted last month that 11 large U.S. lenders could incur losses ranging from $55.3 billion to $179.2 billion, most of which would come in the next three years.

To contact the reporter on this story: Craig Trudell in New York at ctrudell1@bloomberg.net.

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