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JPMorgan Trims Biggest Mortgage Putback Estimate to $90 Billion

JPMorgan Chase & Co. analysts lowered their estimate for the cost to sellers of repurchasing soured U.S. mortgages to as much as $90 billion from a range that went as high as $120 billion.

JPMorgan analysts led by John Sim and Ed Reardon removed some potential losses from their previous forecast to account for issuers including New Century Financial Corp. and Lehman Brothers Holdings Inc. having failed, they wrote. They also fine-tuned their assumptions for how successful investors may be in winning fights over loans underlying so-called private-label, or non-agency, mortgage bonds, which lack government-backed guarantees.

Future losses from repurchases of home loans whose quality failed to meet sellers’ promises will probably be $40 billion, the analysts wrote in an Oct. 29 report covering debt securitized from 2005 through 2007. On Oct. 15, they forecast likely losses of $55 billion to as much as $120 billion in a “stress” scenario.

“The private-label market typically has the burden to prove, with respect to any given loan, that a breach of a representation or warranty has materially and adversely impacted the value of the loan,” the New York-based analysts wrote.

Mortgage-bond analysts at Bank of America Corp., which along with JPMorgan is among the lenders being targeted by debtholders, said in a report that remaining repurchase losses may total $46 billion. That figure assumes investors in private- label securities seek buybacks on 50 percent of loans that went delinquent in the first two years and succeed with 50 percent of those.

$25.1 Billion

Assuming the bondholders win 25 percent of requests, those New York-based analysts, led by Chris Flanagan, wrote in an Oct. 29 report that losses likely will total $25.1 billion. Their figures also excluded amounts potentially owed by defunct originators and also included mortgages sold to or guaranteed by government-supported Fannie Mae and Freddie Mac.

The latest JPMorgan report included an estimate that mortgage-bond investors will seek so-called putbacks on about 25 percent of defaulted mortgages. Because investors will need to demonstrate that misstatements about the quality of loans inflated the debts’ apparent value, the analysts said they adjusted the odds they used for how successful putback attempts will be based on how quickly mortgages went bad.

The analysts assumed that investors’ success rate will be 50 percent for loans that went delinquent in their first 12 months, 40 percent for mortgages whose borrowers stopped paying between one and two years, and 30 percent for loans with later delinquencies, according to their report.

They are also now assuming higher success rates for mortgages whose borrowers were required to provide full documentation of their income and assets, because loans made with less paperwork were “stated as such,” they said.

“Even if buyers claim that fraud was more rampant for limited/no doc loans, they will bear the burden of proving that fraud was committed,” the analysts wrote. “And even if fraud could be proved, not all deals included representations with respect to fraud and not all representations are the same.”

To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.

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