Warranties of representation, and forced repurchase of loans
JP Morgan has increased its reserves with regards to repurchase of sold securities but the information surround these actions are very limited as the company does not separately report the repurchase reserves created to meet contingencies. However, the Company’s income from mortgage servicing was severely impacted by increase in repurchase reserves. Mortgage production revenue was negative $192 million against negative $70 million in 3Q09 and positive $62 million in 4Q08.
Counterparties who are accruing losses from bad loans, (ex. monoline insurers such as Ambac and MBIA, see A Super Scary Halloween Tale of 104 Basis Points Pt I & II, by Reggie Middleton circa November 2007,) are stepping up their aggression in pushing loans that appear to breach certain warranties or smack of fraud. I expect this activity to pick up significantly, and those banks that made significant use of brokers and third parties to place mortgages will be at material risk – much more so than the primarily direct writers. I’ll give you two guesses at which two banks are suspect. If you need a hint, take a look at who is increasing reserves for repurchases! JP Morgan and their not so profitable acquisition, WaMu!
As I said, losses should be ramping up on the mortgage sector. Notice the trend of housing prices after the onset of government bubble blowing: If Anybody Bothered to Take a Close Look at the Latest Housing Numbers…
PNC Bank and Wells Fargo are in very similar situations regarding acquiring stinky loan portfolios. I suggest subscribers review the latest forensic reports on each company to refresh as the companies report Q4 2009 earnings. Unlike JPM, these banks do not have the investment banking and trading fees of significance (albeit decreasing significance) to fall back on as a cushion to consumer and mortgage credit losses.
March 5 (Bloomberg) – Fannie Mae andFreddie Mac may force lenders includingBank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages.
That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says U.S. banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.
The surge shows lenders are still paying the price for lax standards three years after mortgage markets collapsed under record defaults. Fannie Mae and Freddie Mac are looking for more faulty loans to return after suffering $202 billion of losses since 2007, and banks may have to go along, since the two U.S.- owned firms now buy at least 70 percent of new mortgages.
…
Freddie Mac forced lenders to buy back $4.1 billion of mortgages last year, almost triple the amount in 2008, according to a Feb. 26 filing. As of Dec. 31, Freddie Mac had another $4 billion outstanding loan-purchase demands that lenders hadn’t met, according to the filing. Fannie Mae didn’t disclose the amount of its loan-repurchase demands. Both firms were seized by the government in 2008 to stave off their collapse.
….
The government’s efforts might be counterproductive, since the Treasury and Federal Reserve are trying to help banks heal, FBR’s Miller said. The banks have to buy back the loans at par, and then take an impairment, because borrowers usually have stopped paying and the price of the underlying homehas plunged. JPMorgan said in a presentation last month that it loses about 50 cents on the dollar for every loan it has to buy back.
Striking a Balance
“It’s a fine line you’re walking, because the government’s trying to recapitalize the banks, not put them in bankruptcy, and then here’s Fannie and Freddie putting more pressure on the banks through these buybacks,” FBR’s Miller said. “If it becomes too big of an issue, the banks are going to complain to Congress, and they’re going to stop it.” [Of, course! Let the taxpayer eat the losses borne from our purposefully sloppy underwriting]
Bank of America recorded a $1.9 billion “warranties expense” for past and future buybacks of loans that weren’t properly written, seven times the 2008 amount, the bank said in a Feb. 26 filing. A spokesman for Charlotte, North Carolina- based Bank of America, Scott Silvestri, declined to comment.
JPMorgan, based in New York, recorded $1.6 billion of costs in 2009 from repurchases, including $500 million of losses on repurchased loans and $1 billion to increase reserves for future losses, according to a Feb. 24 filing.
“It’s become a very meaningful issue, and it will continue to be a meaningful issue for the next couple of years,” Charlie Scharf, JPMorgan’s head of retail banking, said at a Feb. 26 investor conference. He declined to say when the repurchase demands might peak.
…
“I can’t forecast the rates at which they’re going to continue,” she said. Her division lost $3.84 billion last year, as the bank overall posted a $6.28 billion profit. “The volume is increasing.”
Wells Fargo, ranked No. 1 among U.S. home lenders last year, bought back $1.3 billion of loans in 2009, triple the year-earlier amount, according to a Feb. 26 filing. The San Francisco-based bank recorded $927 million of costs last year associated with repurchases and estimated future losses.
…
Citigroup increased its repurchase reserve sixfold to $482 million, because of increased “trends in requests by investors for loan-documentation packages to be reviewed,” according to a Feb. 26 filing.
“The request for loan documentation packages is an early indicator of a potential claim,” New York-based Citigroup said.
…
Banks that sell mortgages to Fannie Mae and Freddie Mac have to provide “representations and warranties” assuring that the loans conformed to the agencies’ standards. With more loans going bad, the agencies are demanding that banks turn over loan files, so they can scour the records for missing documentation, inaccurate data and fraud.
…
The most common include inflated appraisals or falsely stated incomes in the loan applications, said Larry Platt, a Washington-based partner at law firm K&L Gates LLP who specializes in mortgage-purchase agreements. The government agencies hire their own reviewers who go back and compare the appraisals with prices from historical home sales, he said.
“They may do a drive-by for a visual inspection,” he said.
Wells Fargo said three-fourths of its repurchase requests came from Freddie Mac and Fannie Mae. While investors may demand repurchase at any time, most demands occur within three years of the loan date, Wells Fargo said.
The mortgage firms are looking at every loan more than 90 days past due and “asking us basically to give them all the documentation to show that it was properly underwritten,” JPMorgan’s Scharf said. “We then go through a process with them that takes a period of time, and literally it’s every loan, loan-by-loan, and have the discussion on whether or not we actually should buy the loan back.”
…
Mortgage repurchases may crimp bank earnings through 2011, Oppenheimer’s Kotowski said. That’s because the worst mortgages — those underwritten in 2007 — are just now coming under the heaviest scrutiny, he said.
…
“The worst of the stress is the 2007 vintages, though 2006 and 2005 weren’t a whole lot better and 2008 wasn’t much better,” Kotowski said.
Next week, the Mortgage Bankers Association is holding a workshop in the Dallas area that promises to help banks “survive the buyback deluge” and “build up your repertoire of lender defenses.” According to the MBA’s Web site, the workshop is sold out.
That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says U.S. banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.
The surge shows lenders are still paying the price for lax standards three years after mortgage markets collapsed under record defaults. Fannie Mae and Freddie Mac are looking for more faulty loans to return after suffering $202 billion of losses since 2007, and banks may have to go along, since the two U.S.- owned firms now buy at least 70 percent of new mortgages.
…
Freddie Mac forced lenders to buy back $4.1 billion of mortgages last year, almost triple the amount in 2008, according to a Feb. 26 filing. As of Dec. 31, Freddie Mac had another $4 billion outstanding loan-purchase demands that lenders hadn’t met, according to the filing. Fannie Mae didn’t disclose the amount of its loan-repurchase demands. Both firms were seized by the government in 2008 to stave off their collapse.
….
The government’s efforts might be counterproductive, since the Treasury and Federal Reserve are trying to help banks heal, FBR’s Miller said. The banks have to buy back the loans at par, and then take an impairment, because borrowers usually have stopped paying and the price of the underlying homehas plunged. JPMorgan said in a presentation last month that it loses about 50 cents on the dollar for every loan it has to buy back.
Striking a Balance
“It’s a fine line you’re walking, because the government’s trying to recapitalize the banks, not put them in bankruptcy, and then here’s Fannie and Freddie putting more pressure on the banks through these buybacks,” FBR’s Miller said. “If it becomes too big of an issue, the banks are going to complain to Congress, and they’re going to stop it.” [Of, course! Let the taxpayer eat the losses borne from our purposefully sloppy underwriting]
Bank of America recorded a $1.9 billion “warranties expense” for past and future buybacks of loans that weren’t properly written, seven times the 2008 amount, the bank said in a Feb. 26 filing. A spokesman for Charlotte, North Carolina- based Bank of America, Scott Silvestri, declined to comment.
JPMorgan, based in New York, recorded $1.6 billion of costs in 2009 from repurchases, including $500 million of losses on repurchased loans and $1 billion to increase reserves for future losses, according to a Feb. 24 filing.
“It’s become a very meaningful issue, and it will continue to be a meaningful issue for the next couple of years,” Charlie Scharf, JPMorgan’s head of retail banking, said at a Feb. 26 investor conference. He declined to say when the repurchase demands might peak.
…
“I can’t forecast the rates at which they’re going to continue,” she said. Her division lost $3.84 billion last year, as the bank overall posted a $6.28 billion profit. “The volume is increasing.”
Wells Fargo, ranked No. 1 among U.S. home lenders last year, bought back $1.3 billion of loans in 2009, triple the year-earlier amount, according to a Feb. 26 filing. The San Francisco-based bank recorded $927 million of costs last year associated with repurchases and estimated future losses.
…
Citigroup increased its repurchase reserve sixfold to $482 million, because of increased “trends in requests by investors for loan-documentation packages to be reviewed,” according to a Feb. 26 filing.
“The request for loan documentation packages is an early indicator of a potential claim,” New York-based Citigroup said.
…
Banks that sell mortgages to Fannie Mae and Freddie Mac have to provide “representations and warranties” assuring that the loans conformed to the agencies’ standards. With more loans going bad, the agencies are demanding that banks turn over loan files, so they can scour the records for missing documentation, inaccurate data and fraud.
…
The most common include inflated appraisals or falsely stated incomes in the loan applications, said Larry Platt, a Washington-based partner at law firm K&L Gates LLP who specializes in mortgage-purchase agreements. The government agencies hire their own reviewers who go back and compare the appraisals with prices from historical home sales, he said.
“They may do a drive-by for a visual inspection,” he said.
Wells Fargo said three-fourths of its repurchase requests came from Freddie Mac and Fannie Mae. While investors may demand repurchase at any time, most demands occur within three years of the loan date, Wells Fargo said.
The mortgage firms are looking at every loan more than 90 days past due and “asking us basically to give them all the documentation to show that it was properly underwritten,” JPMorgan’s Scharf said. “We then go through a process with them that takes a period of time, and literally it’s every loan, loan-by-loan, and have the discussion on whether or not we actually should buy the loan back.”
…
Mortgage repurchases may crimp bank earnings through 2011, Oppenheimer’s Kotowski said. That’s because the worst mortgages — those underwritten in 2007 — are just now coming under the heaviest scrutiny, he said.
…
“The worst of the stress is the 2007 vintages, though 2006 and 2005 weren’t a whole lot better and 2008 wasn’t much better,” Kotowski said.
Next week, the Mortgage Bankers Association is holding a workshop in the Dallas area that promises to help banks “survive the buyback deluge” and “build up your repertoire of lender defenses.” According to the MBA’s Web site, the workshop is sold out.
Independent Look into JP Morgan
:
The JP Morgan forensic preview is now available. Remember, this is
not subscription material, but a “public preview” of the material to
come. I thought non-subscribers would be interested in knowing what my
opinion of the country’s most respected bank was. There is some
interesting stuff here, and the subscription analysis will have even
more (in terms of data, analysis and valuation). As we have all been
aware, the markets have been totally ignoring valuation for about two
quarters now. It remains to be seen how long that continues.Click
graph to enlarge
Cute graphic above, eh? There is plenty of this in the public
preview. When considering the staggering level of derivatives employed
by JPM, it is frightening to even consider the fact that the quality of JPM’s
derivative exposure is even worse than Bear Stearns and Lehman‘s
derivative portfolio just prior to their fall. Total net
derivative exposure rated below BBB and below for JP Morgan currently
stands at 35.4% while the same stood at 17.0% for Bear Stearns (February
2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear
Stearns and Lehman Brothers, don’t we??? I warned all about Bear
Stearns (Is
this the Breaking of the Bear?: On Sunday, 27 January 2008) and
Lehman (“Is
Lehman really a lemming in disguise?“: On February 20th, 2008)
months before their collapse by taking a close, unbiased look at their
balance sheet. Both of these companies were rated investment grade at
the time, just like “you know who”. Now, I am not saying JPM is about
to collapse, since it is one of the anointed ones chosen by the
government and guaranteed not to fail – unlike Bear Stearns and Lehman
Brothers, and it is (after all) investment grade rated. Who would you
put your faith in, the big ratings agencies or your favorite blogger?
Then again, if it acts like a duck, walks like a duck, and quacks like a
duck, is it a chicken??? I’ll leave the rest up for my readers to
decide.This public preview is the culmination of several
investigative posts that I have made that have led me to look more
closely into the big money center banks. It all started with a hunch
that JPM wasn’t marking their WaMu portfolio acquisition accurately to
market prices (see Is
JP Morgan Taking Realistic Marks on its WaMu Portfolio Purchase?
Doubtful! ), which would very well have rendered them
insolvent – particularly if that was the practice for the balance of
their portfolio as well (see Re:
JP Morgan, when I say insolvent, I really mean insolvent). I then
posted the following series, which eventually led to me finally breaking
down and performing a full forensic analysis of JP Morgan, instead of
piece-mealing it with anecdotal analysis.
- The
Fed Believes Secrecy is in Our Best Interests. Here are Some of the
Secrets- Why
Doesn’t the Media Take a Truly Independent, Unbiased Look at the Big
Banks in the US?- As
the markets climb on top of one big, incestuous pool of concentrated
risk…- Any
objective review shows that the big banks are simply too big for the
safety of this country- Why
hasn’t anybody questioned those rosy stress test results now that the
facts have played out?You can download the public
preview here. If you find it to be of interest or insightful, feel free
to distribute it (intact) as you wish.
JPM Public Excerpt of Forensic Analysis Subscription 2009-09-18 00:56:22 488.64 Kb
Tags: Asset Securitization Crisis, Banking, Commercial Banks, Current Affairs, Financial Shenanigans, Heard on the Street, Mortgage Banking
http://www.gold-eagle.com/gold_digest_01/hamilton091001.html A bit dated but intresting reading.
http://www.reuters.com/article/idCNN0424397920100304?rpc=44
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=wamuq&sid=0&o_symb=wamuq&freq=1&time=4
Full Barney Frank letter:
Mr. Brian Moynihan
Bank of America
Mr. Vikram Pandit
Citigroup
Mr. James Dimon
JP Morgan Chase
Mr. John Stumpf
Wells Fargo
Dear Messrs. Moynihan, Pandit, Dimon and Stumpf:
The mortgage foreclosure crisis that began over two years ago, and which continues to be a prime contributor to our nation’s current economic downturn, burdens millions of hard-working American families. Congress and the Obama Administration have worked hard to address foreclosures by enabling and encouraging loan modification s, but the private sector’s response has fallen far short of the need. Many homeowners are eager to save their homes despite being “underwater,” but find that lenders and servicers are unable or unwilling to make necessary modi fications. These homeowners are increasingly deciding to walk away and thus foreclosures continue to mount, deepening the crisis.
To save homes on a large scale, we must move past temporary modifications in interest rates or terms and focus on permanent principal reductions that result in truly sustainable mortgages. There is no more important priority for me in our efforts to restore stability to our mortgage market.
Many investors in first-lien mortgages have indicated that they are willing to accept the fact of significant losses on those investments in order to move on and use their money for other purposes, rather than having it locked in underwater mortgages with a high and growing likelihood of foreclosure. With the interests of homeowners and investors aligned in this way, it should follow that large numbers of principal-reduction modifications could be made relatively quickly. That is not happening. According to investors, Administration officials, and other experts I have consulted, holders of second-lien mortgages are now a principal obstacle to many modifications. The problem of second-lien mortgages standing in the way of successful principal reduction modifications has reached a critical stage and requires immediate
attention from your institutions.
Large numbers of these second liens have no real economic value – the first liens are well underwater, and the prospect for any real return on the seconds is negligible. Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans, which would allow willing first lien holders to reduce principal and keep
borrowers in their homes.
The four organizations you lead are major participants in the second-lien market. Failure to modify these debts has become a major and unnecessary obstacle to thousands of Americans being able to stay in their homes. I urge you in the strongest possible terms to take immediate steps to write down these second mortgages and allow principal reduction modifications of the underlying first liens to take place. If there are legal obstacles to your doing so, we will work with you to remove them.
I will be calling you within the week to discuss what your institutions plan to do to remove the second liens you own or control as impediments to principal reduction modifications.
http://www.bloomberg.com/apps/news?pid=20601087&sid=ay..a15ZCHJU&pos=2
We’ve actually been working on that over the last 24 hours. There appears to be more to it than meets the eye. I am absolutely dumbfounded at the amount of negative macro news hitting the wires as the market STILL climbs higher. Now, it appears from a purist’s perspective that there is no doubt that there will be a crash, just doubt in the timing of such.
EXACTLY what I was thinking, to see Chinese stocks rallying on this news leaves me dumbfounded. Will look forward to your thoughts on this. Appears to me to be an implicit admission that Chinese loan issues are serious.
what are you looking at or doing to help yourself with timing?
I’m sitting back in cash waiting for the opportunity. I feel there is obvious manipulation in the markets and unless you are a full time swing trader attempting to time the event is gambling at best. What I am doing now is analyzing exactly what the event(s) will be. I am coming out with a massive finale to the European sovereign debt crisis series that will outline just that.
I am also going through the recommended budget cuts and revenue add-ons for each at-risk country to see if there really is a snowballs chance in hell that they will be able to pull off what the allege. I am not finished yet, but it doesn’t look very likely thus far. We shall see as I compile and analyze more data.
Of course all of this will be published to subscribers.
awesome Reggie, will very much look forward to it.
not sure what kind of technical analysis you use to optimize entry points but feel free to PM me on here if you are interested in what I use. If you have a bloomberg I can send you the settings and systems I run for the charting tools I have developed. It is quite easy to get comfortable with the simple parts of the system and can only be a positive if you aren’t using any system at all right now. Simply day trading a 5 minute chart with a paper trading account for little while and you will see the value and is the best way to quickly get comfortable with the systems and their rules.
I’ve read elsewhere that the concept of notional value creates the idea in the reader that such a staggering amount as in J.P. Morgan’s case is sufficient to annihilate the economic order many times over. It’s the hydrogen bomb of finance or as stated by Buffett, financial weapons of mass destruction. Given this, I’ve read since these notional derivative values are hedged, that staggering amount resolves to just a firecracker going off thereby belying the fact of the significance of such a large number and its implied consequences.
Is this true, Reggie that, that large number is only of value as a quantity but not as it concerns its financial impact?
That staggering amount you are referring to is a reference amount upon which the transactions are based. Yes, the amounts at risk can seem exaggerated due to offsetting positions reducing the amount each company is exposed to, but the perceptions of protection offered by the offsetting amount are quite exaggerated as well. Just because you have $50 billion in risks hedged with other companies does not mean that those companies will pay when/if the bill comes due. As a matter of fact, when there is such a tight circle of participants – one can be guaranteed not to pay when out of 6 banks 6 of them rely on the other 5 for hedging and protection. Thre is no true risk transfer or outside capital, thus in the case of an unforeseen or catastrophic event ala LTCM, Ambac and AIG, you will need outside forces and outside capital to settle the debts.
Was the notional risks of AIG overblown? if so, then somebody owes the US taxpayer several hundred billion dollars!!!
Was the notional