Freddie-Fannie Push Bank Bad Debt Cost to $84 Billion: Mortgages
Fannie Mae and Freddie Mac have expanded efforts to get refunds on soured mortgages, boosting the cost of faulty home loans and foreclosures at the biggest U.S. banks since 2007 to at least $84 billion.
Bank of America Corp., Wells Fargo & Co. (WFC), JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Ally Financial Inc. (ALLY), set aside almost $3 billion to buy back bad home loans in the first half of 2012, according to data compiled by Bloomberg. Regional lenders including SunTrust Banks Inc. (STI) disclosed at least $1.3 billion of added costs, exceeding their total for all of 2011.
“More and more financial institutions are reporting this and some of those that behaved themselves pretty well during the mortgage cycle are starting to see this happen,” said Blake Howells, an analyst with Becker Capital Management Inc., which oversees about $2.3 billion, including shares in JPMorgan and PNC Financial Services Group Inc. (PNC) “It certainly impairs earnings power.”
Fannie Mae (FNMA) and Freddie Mac are stepping up attempts to hunt down and sell back faulty mortgages bought from lenders during the U.S. housing bubble, according to bankers, investors and analysts. The goal is to whittle down the $190 billion cost of bailouts for the two taxpayer-backed firms. Investors’ concern about the potential damage helped push Bank of America’s stock down 40 percent since the end of 2010 and discouraged some banks from writing new mortgages, regulators have said.
Bank of America, whose Countrywide unit was the biggest mortgage lender before the housing bust, added $677 million to reserves for buying back bad loans in the first half of this year while San Francisco-based Wells Fargo, the current market leader, set aside $1.1 billion. Total mortgage-related costs for the 15 biggest U.S. banks and Ally rose by $7.7 billion to at least $84.2 billion since 2007, the data show.
Bloomberg’s tally was assembled from regulatory filings, company statements and financial presentations from U.S. lenders since the start of 2007. The data cover provisions and expenses tied to repurchases, foreclosure errors and abuses, payments to reimburse investors for lost value on faulty mortgages, legal settlements and litigation expenses.
It also includes some writedowns of assets, such as mortgage servicing rights, when the company specifically attributed the loss in value to problems in mortgage underwriting or foreclosures and the costs of remedies. The totals may increase as more detailed breakdowns become available. Actual losses may be lower if banks recover some of the costs by reselling the loans or seizing the property.
Regulators seized Fannie Mae and Freddie Mac (FMCC) -- known as government-sponsored enterprises, or GSEs -- four years ago after their purchases of risky loans pushed them to the brink of collapse.
The GSEs bought about $2.2 trillion of mortgages from the 15 biggest banks and Ally between 2006 and 2009, according to Inside Mortgage Finance, a trade journal. Some of the loans were based on faulty data about borrowers and properties -- flaws that give Fannie Mae and Freddie Mac the right to “put back” the debts, or resell them to the banks.
Fannie Mae has been run since June by Chief Executive Officer Timothy Mayopoulos, who was fired from Bank of America in 2008 during a dispute over the decision to buy Merrill Lynch & Co. Under Mayopoulos, 53, Fannie Mae is continuing its search for defects in loans bought between 2005 and 2008 -- including those purchased from Bank of America -- and has added staff to uncover more of them, according to a person with direct knowledge of the process. The person declined to be identified because he wasn’t authorized to speak on the topic.
Fannie Mae and Bank of America are locked in a dispute over how much the Charlotte, North Carolina-based lender will be forced to take back. The lender, which has called some claims “inconsistent,” refused to buy back most loans and stopped selling new mortgages to Fannie Mae in February. Unresolved demands for buybacks from the GSE swelled to $9.42 billion as of June 30, compared with $5.45 billion at the end of 2011.
Bank of America added $1.5 billion of mortgage-related costs in the first half, including repurchase provisions, bringing total costs since 2007 to about $43 billion.
Its shares rose 1.2 percent to $7.87 at 4:15 p.m. in New York. While Bank of America has gained 42 percent this year, its declined from $15.25 in January 2011.
“It’s tough to see when this will end,” said Kevin Barker, a mortgage and banking analyst at Compass Point Research and Trading LLC in Washington. “There’s a distinct overhang for these stocks.”
Jerry Dubrowski, a spokesman for the bank, declined to comment for this article.
Fannie Mae asked banks to buy back about $14 billion of loans for the first half of this year, compared with $12.3 billion in the same period last year. Banks including Wells Fargo and PNC have blamed changes in behavior at the GSEs for an increase in pending claims.
“Fannie Mae has not changed its criteria for evaluating loans for potential repurchase,” Andrew Wilson, a spokesman for the Washington-based firm, said in an e-mailed statement. “What changed was the volume of loans from 2005-2008 that did not meet our standards and therefore must be repurchased by lenders.”
Freddie Mac is also under pressure to step up claims, according to analysts including Tim Rood of Washington-based Collingwood Group LLC, an advisory firm. McLean, Virginia-based Freddie Mac was criticized in a watchdog agency report last year for checking too few loans for flaws, while auditors said internal controls were “unsatisfactory.”
The firm hired former JPMorgan and E*Trade Financial Corp. (ETFC) executive Donald H. Layton as CEO in May and changed its policies to review more loans, according to a quarterly filing. While Freddie Mac’s $4.91 billion of repurchase claims at the end of June were down from $5.37 billion a year earlier, the company expects to increase demands as employees trawl through a bigger book of mortgages.
“Over the next six months, they’re going to redouble if not triple their efforts in that space,” Rood said in a phone interview. “As bad as they think it is today, it’s about to get worse, if you’re a financial institution.”
Brad German, a spokesman for Freddie Mac, said in an e-mailed statement that the firm was committed to getting its money back on faulty loans “that shouldn’t have been delivered to us in the first place.”
Wells Fargo is feeling the impact as the GSEs undergo “behavioral changes,” Chief Financial Officer Timothy Sloan told analysts July 13. The San Francisco-based bank’s $1.1 billion in repurchase provisions was more than double the $491 million it set aside for the same period last year.
Regional banks have also become targets. PNC, the eighth-biggest U.S. lender by assets, has set aside $470 million so far this year for repurchasing bad loans, compared with $106 million for all of 2011. The provisions are about 35 percent of the Pittsburgh-based lender’s $1.36 billion first-half profit.
“I’m disappointed by the size of the provision for mortgage repurchases,” PNC Chief Executive Officer James Rohr, 63, told analysts on a July 18 conference call. “It’s a function of our recent experience and our new expectations regarding mortgage repurchase activity from both GSEs.”
Capital One Financial Corp. (COF), the ninth-biggest bank, set aside $349 million for the first half, compared with the $212 million that the McClean, Virginia-based lender added for all of last year. SunTrust, the eleventh-biggest, set aside $330 million for the first half, compared with $502 million for 2011.
“The perception is that the largest banks are really at the heart, or at least a large part, of the underlying mortgage crisis,” said Todd Hagerman, a former Federal Reserve examiner and now an analyst with Sterne Agee & Leach Inc. “They really don’t associate their community bank as being part of that problem.”
The worst is over for JPMorgan, the biggest U.S. bank, according to CFO Douglas Braunstein. He told analysts July 13 that the New York-based lender has reached an “inflection point” for buying back bad loans. The company added $359 million to reserves in the first half to cover refunds.
Alex Lieblong, head of Key Colony Management LLC, an investment firm in Little Rock, Arkansas, said that Fannie Mae and Freddie Mac’s demands have probably peaked, with most of the claims from the GSEs dating from the boom years before standards were tightened in more recent years.
“Back then, anybody that could fog a mirror could get a mortgage,” Lieblong, who oversees more than $100 million including shares in Wells Fargo and Bank of America, said in an interview. “They were all stupid at the same time.”
Other lenders may find the scrutiny isn’t over yet. Glen Messina, CEO of mortgage firm PHH Corp. (PHH), said Aug. 8 that the GSEs could still be reviewing the Mount Laurel, New Jersey-based company’s delinquent loans dating from between 2005 and 2008 until the end of next year.
“It’s a waiting game,” said Howells, the Becker Capital Management analyst. “It just depends on how far back and how deep the GSEs want to go.”
To contact the reporters on this story: Donal Griffin in New York at email@example.com; Laura J. Keller in New York at